Don’t wait for stocks to bottom. Here’s the best way to buy into the market amid volatility

Published Sat, May 14 20228:39 AM EDT

Market strategists are waiting for markets to hit a bottom, but investors sitting in cash should probably get off the sidelines and buy stocks. Indeed, the S & P 500 was down more than 16% from its record high at Friday's close, while the Nasdaq Composite was off about 27% from its all-time high. Stocks launched a relief rally on Friday but were still negative for the week, raising questions on whether this latest bounce finally marks a change in market sentiment. "The right answer is to never stop buying," said Josh Brown, CEO of Ritholtz Wealth Management. "You shouldn't wake up every day and face the question of whether today is the day to buy." If you've been waiting to dip a toe back into stocks, here's how to get started. Knowing your time horizon Investors should be cognizant of their goals for the money they put back into the market. Dollars stashed for the long term may be better suited to ride out day-to-day volatility. Meanwhile, money that's needed in the immediate term should be kept in cash or short-term fixed income instruments. How you return to the market also counts: You could dollar-cost average into stocks or, if you have a pile of cash on the side, make a lump-sum purchase. A 2021 study from Northwestern Mutual found that investing a $1 million lump sum all at once and fully in stocks resulted in better cumulative total returns at the end of 10 years compared to dollar-cost averaging almost 75% of the time. Don't discount the good habits of dollar-cost averaging, though. Automating incremental purchases into the market over time removes the pressure to time your investing. "The way we express humility with investments is to diversify not just within the investments but also your timing – and that's what you do with dollar cost averaging," said Christine Benz, director of personal finance at Morningstar. "You never buy at exactly the right time, but you never buy exactly at the wrong time." Where are you buying? Investors hopping back into the market must decide where they'll deploy their cash. Don't expect the prior bull market's leaders to be at the front of the pack in the next run-up, said Ritholtz's Brown. "I think a smart strategy in a market like this is to look for areas that are showing relative strength versus the rest of the market," he said. "These are the stocks that are going down the least on very deeply red days." Energy stocks, along with oil and gas companies, fit the bill, Brown said. He also highlighted high quality dividend payers, small cap value and defense contractors on that list. If you'd rather not pick through individual stocks, consider aiming for broad diversification through cheap exchange-traded funds – or even balanced funds or target-date funds, if you're truly hands off, said Morningstar's Benz. "The beauty of target-date funds is that they are buyers in down markets and want to maintain some sort of target allocation," she said. "They're in there on the bad days, topping up equity exposure, which is something we individual investors aren't inclined to do."

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Market strategists are waiting for markets to hit a bottom, but investors sitting in cash should probably get off the sidelines and buy stocks.