So you’ve got your hands on a bit of money. You listen to your financially well-off friends and decide to invest it. They say to invest it into ETFs so you decide on SPY. Right before investing you take a peek at the stock graph and……. almost jump out of your pants!
“It’s so FREAKING EXPENSIVE right now.”
How in the world are you supposed to invest now when the stock market is so high??? Should you wait a bit for it to come down? Should you not invest at all?
Don’t worry. In this post I talk about how to decide when to invest money into the market. Hopefully by the end of it you’ll have a better idea of your own risk tolerance and better understand whether you should start buying up stocks right now or wait for a better time.
Current Market Conditions
Before we dive into how to determine when to deploy your money, let’s establish where we are today as a baseline. By almost any metric you use, the stock market is very HIGH right now.
You don’t need to be a stock expert to know this. All you need to do is to look at the charts… in the middle of a worldwide virus, the S&P500 is hitting all-time highs almost every day.
Furthermore, looking at the cyclically adjusted PE ratio (or cape ratio), you can see that stocks, on average, are trading are pretty high levels historically. Now, the CAPE ratio is at 36.8 as of this writing, which isn’t quite as high as it was in 2000 when the dot com bubble burst, but it IS higher than it was in 2008, 1987, and even 1929 (right before the Great Depression).
So clearly our current stock market prices aren’t something to write off.
What You Could Gain from Entering the Market
Let’s start with discussing the upside case that everyone is familiar with. What can you gain from investing?
Well, historically the S&P500 has compounded on an (inflated adjusted) rate of around 8% every year. What this means is that if you invested $10,000 today, in 30 years you’d have around $100,000. That’s 10x your buying power! Pretty impressive.
What could you do with $100,000? Well that’s up to you, but it’s worth noting that most retirees nowadays don’t retire with nearly enough money to support themselves. So investing might actually be a MINIMUM requirement for leading a healthy and happy life post-your career.
Even on the short term, there have been some crazy runs in the market that you could benefit from. From last year this time to now, the S&P500 has increased nearly 50%!!!!! That is pretty wild and could benefit your lifestyle significantly.
There is truly tons to gain from entering the market, from building up a nest egg to making some short-term spending money.
What You Could Lose from Entering the Market
Of course, when thinking about how to decide when to invest money into the market, it’s not very wise to just focus on the upside scenario. We also have to consider what you could lose.
Here is where things get a little complicated. The amount that you could lose in the stock market depends almost PURELY on your time horizon. Basically, how long you plan on keeping your money in the market determines how much you could suffer.
1 year time horizon? No guarantees my friend (you could lose almost all your money). 5 year time horizon? Ehh, a little better but you can still lose money. 25 year time horizon?…… it’s REALLY unlikely that you’ll lose money investing in a large ETF like SPY.
How is this possible? Well let’s do a quick mental deduction.
The stock market basically represents the economy itself (I know there are private companies and they aren’t strictly the same but bear with me). The economy is pretty reflective of how society is doing as a whole. Therefore, when there are advancements in society, the stock market tends to go up and vice versa… Now for a fun thought experiment: Let’s say you were to invest in the stock market and over the course of 25 YEARS, you lost money. That would mean that for 25 years, society pretty much didn’t advance. Considering natural population growth and skill growth, this would mean that we would have to basically be getting WORSE as a society.
I don’t know about you, but I think that if society doesn’t advance for 25 YEARS there are bigger problems in the world than your stock portfolio. But, people are constantly innovating and inventing and hustling so if you believe in society, then you should feel comfortable knowing that when investing for the long-term, you have very limited downside.
How to Decide When to Invest Money Into the Market
In true ambiguous fashion, I am going to answer the title question with a question for you: how long are you planning to hold your investment for?
If you answered “over 20 years”, then the best time to invest was yesterday. The second best time is today. It doesn’t really matter if the market is high or not if you’re holding your investment for long enough to ride out the waves.
If you answered 10-15 years, then the answer is still yesterday-ish. This is where there starts to be a slight chance that you could lose money (albeit very small). But barring any hugely unlikely events, you’ll probably be fine holding your investment for this time period.
Less than 10 years and things start to get a bit dicey. Nobody knows what’s going to happen in the short term. NOBODY. Couple that with the fact that the market IS extremely high right now and you have a weird investing environment. By some experts’ calculations, it is VERY hard to imagine anything over 3% returns in the next 10 years. If you’re investing for the short term, when you enter the market matters. So make sure that you’re entering when the market is at a comfortable level (for you personally, since everyone is different).
Start Investing Now! (or don’t)
Usually I end off these posts with a call to action, but this one is a bit different.
You know that the potential upside is huge to investing. But you also know that if you’re only investing for the short-term, you could lose near everything. So now, it’s just a matter of how comfortable you are with where the market is at right now. Can you reasonably picture the market rising 10% per year for the next 15 years? What about 10? or 5? or 1?
How long you’re planning on holding a company/ETF for is going to be a major deciding factor in when you should invest.
So, if you’re investing for the long-term, start now! But if you have a short time horizon, I would prescribe a healthy dose of caution…
Thanks for reading through How to Decide When to Invest Money Into the Market and thank you for following along! If you’re a Canadian Student, check out the Ultimate Canadian Student’s Guide to Personal Finance! To learn more about me, head over to this link here. If you want to get exclusive updates and tips, drop your email in the “get updates” box (might have to scroll up a bit.) Let me know your thoughts and suggestions in the comments!
Jeff is a Harvard 2025 student passionate about making smart financial decisions both in school and in the workplace so that he can spend more time doing what he loves (like playing golf, spending time with family, and travelling). He has experience working in the financial industry and enjoys sharing all things personal finance, academic, and golf-related. Outside of blogging, he loves to cook, read, and golf in his spare time.