I reckon it’s a great time to think about investing money in the stock market, even if you’re doing it for the first time.
We arguably saw the worst of the current recession during the second quarter of the year. And the stock market crash in the spring blew the froth from share prices and knocked down, or out, some of the weaker companies.
Why I’d start investing money in the stock market
There’s been a shake-up since, with strong players adapting to a Covid-19 environment well. Those companies’ shares have been bouncing back. Others still languish. Generally, I reckon the stock market has got most things ‘right’ since the crash, and most shares are where they ‘should’ be.
It’s worth considering that bull runs begin at the bottom of bear moves. And the re-setting we’ve seen has cleared the way for strong businesses to thrive from here. Meanwhile, in the real UK economy, several shorter-term challenges could recede soon.
For example, the UK will have completed its free trade agreement negotiations with the European Union by the end of the year. And the long-running saga of Brexit may begin to fade. On top of that, the world may see a vaccine for Covid-19 soon.
If you invest for the long-term you’ll have a tailwind behind you. Indeed, over timescales measured in decades, the trajectory of the stock market has always been up. So the prospects for investors look good over short and long timescales.
And I’d begin by building a bedrock in my portfolio of tracker funds and investment trusts. But with a little bit of investing experience under my belt, I’d aim for even higher returns by choosing the shares of individual companies.
One overriding consideration
Some investors focus on the cheapness of valuations before anything else. If you look at fallen share prices and see low earnings multiples and high dividend yields, you’re looking at cheap shares. Or if earnings have ‘temporarily’ plunged because of a short-term event – such as the current pandemic – we could deem a share cheap just because it’s fallen.
Another approach involves looking for shares that are leading the market and trading at new highs. Often, operational progress in the underlying business drives those stocks higher and the strength could flag a strong underlying business. A third approach ignores share price movements altogether and focuses on dividend yields. The idea is to collect and compound dividend income rather than to rely on share price movements to deliver a capital gain.
All those investment strategies can be successful. But I reckon one consideration overrides all others when selecting shares – quality. Indeed, Warren Buffett aims to buy what he describes as “wonderful” businesses to hold for the long term. He’s focusing on the quality of the underlying enterprise above all other considerations. And I reckon that’s the safest and most effective way to approach investing.