One of the most common questions we’re hearing from our clients at the moment is, should we be buying shares in the current environment? The stock market has fallen quite dramatically and is at levels we haven’t seen for some time. Indeed, there are opportunities for those who are looking to expand their share portfolio and have a long-term investment horizon, but you should tread carefully. Here we share what you should bear in mind.
Consider your overall financial strategy
Investing in the share market should always form part of an overall long-term investment and wealth creation strategy. As with all investments, you should consider your lifestyle goals and what you’re trying to achieve from the investment. Shares are a volatile asset class – their value fluctuates up and down. What we’ve seen over the past couple of months with the COVID pandemic is they can do so rather dramatically.
If you have a long-term investment horizon and if you aren’t going to need to allocate the money you’re investing in the share market for any other purpose, then go for it. But you want to avoid being in a position where you need to sell your shares to fund part of your lifestyle when they’re down in value. For example, if you would like to buy a home within the next five years, investing in the share market may not be the right move for you.
Base expectations on today, not the previous high
We’re facing a very different future today than we were just six months ago. Prices at the peak of the market were based on expectations of where the economy was going before the pandemic. Pre-COVID, profits were strong, optimism was high, the economy was stable. Post-COVID, profits have been hit and the economy is weak.
We can’t expect the market to rebound to the previous high quickly. We are facing a new reality, one which isn’t as optimistic as before. More people are out of work and we have higher government debt. If you are planning on expanding your portfolio, it’s important that you realign your expectations to this new reality and what the future looks like now.
Focus on long-term value
If you’re able to hang in for the long-term, history shows that investing in the share market can be rewarding. But you have to buy quality companies that will provide good value over the long term.
Simply because a stock is cheaper than it was before the COVID pandemic doesn’t mean it’s a good deal. Some companies may have been overvalued pre-COVID, so coming down to current levels may simply make them fair value.
Keep in mind that company balance sheets are under pressure right now and some companies may not survive the current crisis. Their shares are very cheap compared to what they were beforehand. But when you delve beneath the surface, they present an enormous amount of risk.
One of the biggest challenges with building up a share portfolio is selecting which stocks to buy. You can buy based on the perceived value, the expected long-term growth, the income stream, or a variety of other factors. If you haven’t purchased shares before, it can be quite daunting. Find out what to look for before investing in the share market.
Alternatively, you could look at investing in a quality Exchange Traded Fund (ETF), such as the ASX 200. The ASX 200 comprises of the top 200 companies in Australia and has never failed to regain, and surpass, its previous high.
Don’t try to time the market
It’s still difficult to know at this stage of the COVID crisis what’s going to happen in the market in the short term. Stocks may well get considerably lower in the coming months, but picking the bottom of the market is incredibly difficult. If you want to be speculative, you can hang in there to see if things get any worse, but you risk missing the current buying levels.
Legendary investor and Berkshire Hathaway chairman, Warren Buffet, famously declared “You pay a high price in the stock market for a cheery consensus”. In other words, by the time everyone agrees you should be investing, share prices will have risen.
The COVID pandemic may present some good buying opportunities. But you don’t need to buy at the bottom of the market to be a savvy investor. If investing in the share market fits your overall financial strategy, focus on buying shares in great companies that are well-positioned to deliver value given their potential long-term profits and dividend streams.