It’s tough and a little crazy out there at the moment. The combination of coronavirus and the stock market crash probably mean that buying shares is the last thing on your mind.
However, for long-term investors, I think now could be a great time to buy shares. With so much fear and uncertainty in the market, I’m confident that savvy buyers should be able to pick up some bargains.
In this situation, buying shares and holding them in a Stocks and Shares ISA makes perfect sense. Any future profits from a market recovery will be tax free, as will future dividends. With the tax year due to end on 5 April, there’s still time to deposit cash in an ISA account, even if you don’t invest it yet.
The FTSE 100’s 6.4% yield isn’t real
I often talk about the attraction of dividend stocks. Most of the shares I buy for my personal portfolio are high-yield income stocks. But I have to be honest — this source of income is likely to be slashed in 2020.
Although the FTSE 100 currently boasts a dividend yield of 6.4%, I don’t think this figure is realistic. Over the last few days, a large number of companies have announced plans to suspend their dividend payments.
Widespread quarantining and forced closures mean that it’s very difficult to predict how the rest of the year will unfold. Sensibly, companies are acting to preserve cash and minimise outgoings.
A dividend cut normally tells us that a company has problems. But in this case I think we should see these dividend suspensions for what they are — a sensible precaution.
Unfortunately, I think most of us will need to take a dividend pay cut this year. But I believe that stronger firms will quickly resume dividend payments when trading returns to normal.
Why I’m buying shares
There’s no way to predict what’s going to happen in the next six-to-12 months.
But I think we can be pretty sure what will happen over the longer term. The pandemic will be defeated and the world will gradually return to normal. We’re already seeing this in China. Shops and factories are reopening and movement restrictions are being lifted.
I’m buying shares now because the outlook is so gloomy. At the start of 2020, the FTSE 100 was close to record highs and the market was optimistic. A lot of good news was priced into shares.
Today, that situation has reversed. A lot of bad news is priced into share prices and almost no one is optimistic.
Billionaire investor Warren Buffett urges us to “be greedy when others are fearful”. And without wanting to be insensitive about this human tragedy, I believe now is a good time to be buying shares.
However, if you are thinking about buying, I’d also recommend that you follow another piece of advice from Mr Buffett.
Choose stocks carefully, on the assumption that the stock market could close tomorrow and not reopen for five years.
If you follow this approach, I reckon you’ll have a good chance of beating the market over the coming decade.