Every
body loves a bargain. Except, bizarrely, when it comes to stocks and shares.
Most investors feel more comfortable buying shares when prices — and confidence — are high, rather than when they are low.
That’s the point at which greed trumps fear, and we open our wallets. But it’s usually the very worst time to buy, as it’s all too easy to end up paying over the odds.
A time to buy
Experienced investors train themselves to do exactly the opposite. That means treating a market sell-off exactly as you would treat a trip to the sales, and go shopping.
Last Thursday, the FTSE 100 entered a technical correction after falling more than 10% from its 52-week high of 6878, which it hit as recently as 4 September.
You would have needed nerves of steel to have gone shopping for shares when the index hit 6072, and looked likely to plummet further. But it was also the best buying opportunity for nearly two years.
Look at that income
The FTSE 100 has recovered slightly since then but is still relatively cheap, trading at just 12.7 times earnings. That compares to its long-term average of around 15 times earnings.
Better still, you can lock into a juicy yield of around 3.78%. That compares to just 2% on 10-year UK gilts, and a meagre 0.67% on the average savings account.
The index may fall further, so you may want to keep some money in reserve, to go on another buying spree if it does.
The age of cheap
The wider UK market is actually cheaper than it was 10 years ago, according to new calculations by Laith Khalaf at Hargreaves Lansdown.
This shows that the cyclically adjusted P/E ratio (CAPE) now stands at 14. That’s lower than the figure of 14.8 which is hit in 2003, at the lowest point after the dot.com crash.
It is also way below the long-term average of 19.6.
Khalaf says there is a clear inverse relationship between the CAPE and five-year returns. The lower the CAPE ratio when you buy in, the higher your subsequent returns.
The ratio has been lower at one point in the decade, during the heat of the financial crisis in 2009, when it fell to 11.4. That was of course the mother of all buying opportunities.
I don’t expect markets to fall that low again. But if they do, you should pluck up the courage to take another shopping trip.