Two competing mentalities are at war in the minds of many investors. One is based on our natural tendency to want to avoid losses. With the S&P 500 once again close to bear market territory, the thought of buying stocks could be frightening. The other is driven by the realization that, historically, buying stocks after the market has fallen significantly has often led to good returns over the long term.
Should you buy stocks right now? The answer to the question isn’t as simple as going with the rational conclusion over the emotional one. Actually, the best answer is an old standby – it depends. But what should upset the balance in your decision whether or not to buy shares now?
Don’t buy stocks if …
There is a group of people who absolutely, irrefutably should Not buy stock right now. This group shouldn’t even think about it for a moment at this point: people who don’t have extra cash on hand that they don’t need for anything else. Among your financial priorities, paying your bills and lowering your debt is far more important. If doing these things correctly leaves you with no reserve money to invest … don’t invest. However, there are other people – people who actually have reserve money to invest – who shouldn’t be buying stocks right now.
If, for example, there’s a good chance you’ll have to spend that extra money at some point in the next few years, it’s best to find somewhere else to park it in the meantime. My view is that Series I savings bonds, whose yields are tied to inflation rates, might be a good option for many people given today’s historically high inflation.
Even if the stock market was in a roaring bull market right now, I would still advise people to invest money they may need relatively soon. The stock market is too volatile in the short and medium term to put this type of money at risk.
How long exactly do “the next few years” and “relatively soon” last? You will get different answers to this question from different people. My view, however, is that any cash you might need within the next seven years or so shouldn’t be invested in stocks.
Buy shares if …
What types of investors should be buying stocks right now? All others not mentioned above.
But what if the shares go down even further? Wouldn’t it be better to wait and see what happens? Sure, the market could continue to decline. But no one knows for sure whether or not it will.
You may be able to time the market. If you do, however, it would be pure luck. The most likely scenario, however, is that a dollar cost averaging approach would be better. With the dollar cost averaging, you regularly buy stock of the stock you like, no matter what the market is doing.
Sometimes, you’ll pay less per share for those stocks. Sometimes you will pay more. Over time, however, this strategy has proven to work quite well. And it completely takes emotions out of the equation.
What shares to buy?
Perhaps the most important question to ask is, “What stocks should you buy?” Again, I think it depends. In this case, the answer depends on your personal investment style (especially risk tolerance) and financial goals.
However, I think the best types of stocks to buy in the current market environment are those that have a good chance of performing well regardless of whether there are macro headwinds or not. For instance, Dollar General (DG 0.75%) it has produced a positive year-to-date yield despite rising inflation.
The discounter was also a big winner during the stock market boom of the past decade. Consumers always like bargains. They always like comfort. Dollar General provides both. Its prices are low every day. And with 18,500 stores (and growing), there’s a Dollar General located within five miles of three-quarters of the US population.
Vertex Pharmaceuticals (VRTX -1.58%) stands out as another great title to buy right now, in my opinion. Its shares were up nearly 30% in 2022, beating the major market indices.
No other drug manufacturer has an approved therapy that treats the underlying cause of cystic fibrosis. Vertex’s cystic fibrosis drugs continue to generate strong revenue and earnings growth for the company. Furthermore, the major biotechnology pipeline presents several potential candidates for success.
Dollar General and Vertex are not as susceptible to economic downturns as most stocks. Both also have solid long-term growth prospects. Dollar General and Vertex appear to be exactly the types of stocks that investors should consider buying right now.
Keith Speights has positions in Dollar General and Vertex Pharmaceuticals. The Motley Fool has positions and recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.