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Is It a Good Time to Buy Stocks?

Stock prices on Wall Street are at record-breaking levels. Prices are high, interest rates are low and everyone is cheering the mania. But is it a good time to buy stocks? We’ll discuss some economic statistics, core personal finance rules and learn what wealthy investors are doing.

Stock Market Peak of 2020

The Current State of Wall Street, Stocks at All-time Highs and Unemployment

On September 2, 2020 the S&P 500 Index, hit 3,580, the highest it has ever been. The S&P 500 is a measure of some of the largest traded stocks on Wall Street. As a result, the U.S. stock market is literally at its peak right now. In addition, real estate prices are at record highs in many places in the United States. Despite official statistics posted by the US Government, many experts are concerned about inflation, which equates to higher asset prices.

However, juxtaposed to the Wall Street high are the U.S. unemployment numbers. Unemployment is at a record high as well. According to the Bureau of Labor Statistics, 13% of Americans were unemployed in May 2020. In addition, 30 Million Americans filed for unemployment benefits in June 2020. This is approximately 10% of the entire US population (Source: CNBC News).

Next, here are basic statistics that we can use to help with stock market predictions for 2021:

  • US National Debt is now over $26 Trillion
  • Total Debt to GDP for the United states is over 150%
  • The Federal Reserve currently owns approximately 20% of all mortgages in the U.S. today (approximately $2 Trillion)
  • Home foreclosures are beginning to increase
  • Interest rates are at an all-time low and can’t go much lower

The COVID-19 Pandemic and Federal Reserve Money Printing

In 2020, money managers have to make tough decisions about re-balancing portfolios with stocks, bonds, precious metals and even cryptocurrencies. They will have to answer the question, “is it a good time to buy stocks?” The reality is that the stock market cannot continue to rise when people are losing jobs, real inflation is increasing and the US National Debt grows out of control.

In reaction to the COVID-19 pandemic, The U.S. Government borrowed more than $3 Trillion to pay for stimulus. This included payments to governments for supplies, individual payments to citizens and loans and grants for businesses affected by the pandemic.

At the same time, the U.S. Treasury and the Federal Reserve Bank have been working overtime to print money.

“It works like magic. With a few strokes on a computer, the Federal Reserve can create dollars out of nothing, virtually “printing” money and injecting it into the commercial banking system, much like an electronic deposit. By the end of the year, the Fed is projected to have purchased $3.5 trillion in government securities with these newly created dollars…”

USA Today Article, May 13, 2020

Why the Stock Market May Be Overvalued

Stock Buybacks and FAANG Stocks Tilt Market Balance

One other economic concern in the stock market is stock buybacks or “share buybacks.” Stock buybacks are when a company uses cash to repurchase their own stocks. Stock buybacks typically occur when a company has extra cash to spend or when the company can borrow money at a low rate of interest. The result of buybacks is usually an artificially high price for their stocks. When many companies on Wall Street conduct stock buybacks, it can appear as if we’re in a “bull market” and prices are climbing higher.

In addition, the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have had an oversized impact on Wall Street. These tech companies are enormous in size and their movements on the stock market can sway whether the market, as a whole, is up or down. For example, Apple has a valuation now of approximately $2 Trillion, higher than any other publicly traded company.

Investors may get the impression that the market is doing well overall, when in fact, only the FAANG stocks may be up in price. This gives the impression that prices for the market are higher, even though many other much smaller industries may be in decline.

What It All Means: Asset Bubble

It is impossible to predict what will happen in the stock market. Is it a good time to buy stocks? Information and data shared above seems to indicate that prices are at all-time highs and we may be in a bubble. A bubble occurs when prices go up much faster than other indicators in the economy. As a result, this may be a dangerous time to be buying stocks.

Investment Wisdom

Take Control of Personal Finances and Dollar-Cost Averaging

Despite the negative outlook, this is a great time to begin getting your personal finances in order. Thinking and planning for the future are noble activities that we encourage at Piggy Bank Coins. Moreover, every adult should learn to budget, save money and invest at some time in their life. If you have a family, it is critical that you begin planning your financial future.

Is it a good time to buy stocks? Despite its growing popularity, day trading is not recommended for most investors. We recommend a more fiscally conservative approach of slow, incremental saving and wealth building. Is it a good time to buy stocks?

Many people use “dollar-cost averaging” as a part of their investment strategy. Dollar-cost averaging is simply dividing up the amount of money you have to invest over a longer time frame. This investment methodology means that you invest the same amount of money each week or month, no matter if the market goes higher or lower. Dollar-cost averaging takes the emotion out of buying stocks.

What is Your Level of Risk?

Active Versus Passive Investing; Aggressive Versus Conservative Investing

If you want to answer the question of “is it a good time to buy stocks?”, you must determine what style of investor that you are. First, the major categories of investment include active management or passive management. For example, a portfolio manager can determine what investments are in your fund and make decision for you using passive management; however, active management means that you reserve more control of your investments and perhaps you even use online services to trade individual stocks on a daily basis.

Second, you must determine if you are an aggressive or a conservative investor. Aggressive investing is utilized by those who want to take more risk and capture greater returns. This type of investing is considered acceptable for younger investors and for savvy investors who want to dedicate a small portion of their portfolio to higher risk. Conservative investing is a lower risk style of investing. Returns tend to be lower than the aggressive style, but come with lower risk. This style is best for those that desire lower risk and those who are getting closer to retirement age.

Timeline for investing: is it a good time to buy stocks?

Many smart investors have been increasing the amount of cash they have in reserve. For example, in early 2020, Warren Buffet of Berkshire Hathaway claimed to be holding more than $137 Billion in cash.  Many other powerful investors are holding hordes of cash as well, waiting for new opportunities for investment. They are waiting for prices to go down to discount levels so they can buy up cheap assets. Is it a good time to buy stocks? These large investors would say no.

Establish Goals

The first step in your investment journey should be to determine what your financial goals are and what you wish to accomplish. Where do you see yourself in 10, 25 or even 50 years? The average life expectancy for Americans is around 78 years old. However, you may have family members that live to be in their 90s and beyond. If you retire at 65 and live to be 95, will you have enough money invested to last through your retirement years?

Write Down Your Goals

If you want to be retired, living on a beach in Costa Rica in 20 years, then you need to write that down as part of your goals. We recommend creating a notebook, journal or even a spreadsheet where you list exactly what you have planned for the future. This serves two purposes. Writing down your goals makes what you want explicitly clear. It gives you a starting point and also provides you with the details that you will need to determine how you will reach your goals.

The second purpose of planning out your financial goals on paper (or electronically) is that you are signaling to the universe what you want. History has proven that the psychology of desire and intention is a powerful tool in accomplishing goals.

Most Americans Don’t Save Enough Money; Saving Requires Sacrifice

According to Business Insider, the average American Family has approximately $40,000 put aside in savings and investments. While this may sound like a lot of money, it’s not. Think of your monthly expenses and then consider for how long you could live on $40,000. Finally, the answer is you need much more money than you have now.

Saving money can be difficult. In many cases, saving requires that you make sacrifices in your life. For example, you might have to continue driving an older car instead of buying a new one, or do home repairs yourself instead of calling a professional for help. Obviously, no one enjoys making sacrifices.

Budgeting Helps You Save

Retirement is Within Reach if You Use a Budget and Take Control of Your Finances

Budgeting is one of the critical steps that can help you take control of your life and answer these questions. In addition, preparing a budget allows you to not only know where your money goes, but also allows you to plan where your money will go in the future. Finally, it’s important that your money works for you, not against you.

In the process of taking control, we also prepare ourselves for better quality of life by having more money. Having more money means that you have more power to dictate the kind of life you want, especially in retirement.

How Budgeting can help you:

  • Improve your credit score
  • Save for emergencies
  • Save and invest for retirement
  • Stop wasting money and curb bad habits
  • Promote a healthy, meaningful lifestyle
  • Buy a new home or upgrade your existing home
  • Obtain financial freedom

Once you’ve completed your budget, you will be better prepared to answer the question about how much savings you should have at 40.

Determine How Much Money You Need to Live on

You Will Need 70-80% of Your Current Salary for Retirement Expenses

While thinking about budgeting, take a closer look at how much money you need to live on each month. For example, what basic amount of money do you need each month to cover expenses? You need enough money to pay for a place to stay, food, electricity, etc. Don’t include things like vacations, luxury items or entertainment. Once you determine how much you need to live on, you can then start to figure out what retirement expenses look like.

Another common rule of thumb for estimating how much money you need when you retire is the 70-80% Rule. In other words, many experts believe that you will need at least 70-80% of your current income to make ends meet. For example, if you bring home $3,000 each month, then you will likely need approximately $2,100-2400 each month in retirement. This is a realistic way of estimating what you need to retire if you don’t want to do complicated calculations or spend a lot of time on the topic.

The Age That You Will Retire

How old will you be when you retire? This is one of the questions that you want to answer so that you can gauge your progress toward retirement. Ultimately, it will help you determine how much savings you should have at 40. In addition, you can set goals for how much money you need when you reach the milestones of 50 and 60 years old.

Retirement Age

First, if you live in the United States and were born after 1960, you may be eligible to retire at age 67. Second, if you were born earlier than 1960, then the age requirement is 66. These are the ages where you may be eligible for Social Security Benefits. Consequently, you can look at the United States Social Security Benefits Website for additional details. They also offer a retirement calculator and benefits planner there.

Living Below Your Means

After cutting your expenses down to the bear minimum, you should be living below your means (hopefully). Unfortunately, living below your means is a philosophy that most people don’t follow these days. Living below your means requires that you spend less than what you make. For example, if your take home pay is $1500 per month, then living below your means is only spending $1,000 per month.

The extra money that you have from living below your means will serve two purposes. At first the extra money will be used to pay down debts quickly. Getting ahead requires that all debt be paid off first. Secondly, after the debt has been paid off, you will then use the positive cash flow to fund your emergency fund, savings and investments. Each of these is part of your net worth and the buffer between you and poverty. The more you can grow your savings and investment, the simpler and easier life gets.

Pay Off All Debts

Before you can start saving money, you must pay off all debts. Now that you’ve established your budget, cut personal spending to the bare minimum. You will take extra money that you have leftover in your budget and use it to pay down debts. Create a list or accounting of your debts, the corresponding balances and interest rates that you maintain. Use this information to help you keep track of your progress as you pay down debts.

If you are young and just starting out, hopefully your debts are minimal. Having minimal or no debt when you begin your journey toward wealth creation is a huge advantage. Paying off debt can take years and a great deal of sacrifice. So if you have little or no debt, congratulations! For the rest of us, it’s time to get to work paying off debt. 

Work Extra to Pay Down Debt Faster

How do you quickly pay off debt? One of the recommendations made by finance guru Dave Ramsey is to take on a second job. Deliver pizzas, wait tables or pick up an extra shift at your job to earn extra money. Taking on extra work is a temporary measure so it doesn’t really matter what you do. The point is to bring in more money quickly to pay off your debt and be debt-free. Just make sure you’ve truly minimized your expenses first!

Save Money Every Paycheck

Put Aside 10-15% of Your Regular Income for Investment

One of the habits that you want to form that will help you reach your goal is to start saving each paycheck. Make it a habit to take 10-15% of each paycheck and save it. After a short time, you will realize that you don’t even miss the money.

Make saving 10-15% of each paycheck easy by setting up an automatic money transfer, either to your investment account or to your savings account. For example, each time your paycheck is deposited into your checking account, have an automatic transfer set up that moves money into your savings account. Some people even have a savings account that is in a different bank to reduce the temptation of raiding the account.

One of the keys to their success is having a consistent source of income. Every month, or each paycheck, successful investors divert 10-15% of their earnings to investment(s). An example would be investing in a 401(k), Investment Retirement Account (IRA) or Real Estate. Year after year, your money will grow and work for you to create wealth.

Saving a small portion of your regular earnings is far from a new concept. Financially successful people have been doing it for hundreds or thousands of years. Read The Richest Man in Babylon to learn more.

Last Words on Investments

Hopefully this article has helped you better answer the question, “is it a good time to buy stocks?” Although Piggy Bank Coins cannot give you financial advice, it seems clear that the economy is in bubble territory and it may be smart to be conservative with your money at this time. Consider your personal risk tolerance and assess the situation carefully as we move forward.

Read More:

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How to Become a Millionaire from Nothing

Disclaimer: It is important to note that Piggy Bank Coins does not provide financial advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.

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