The stock market rally is a wonder to behold, with the FTSE 100 rebounding 2,000 points from its low of just below 5,000 on 23 March last year. Right now, it is trading at 7,019 points, rewarding those who screwed up their courage and bought at last year’s lows.
History shows that buying shares in the middle of a market crash is a terrific strategy. The stock market will rally, given time. All you have to do is be patient and wait for it to happen.
That said, none but the brave invested in March last year, when the first lockdown had been imposed and global markets were in meltdown. Outright disaster was only averted because central bankers, led by the US Federal Reserve, stepped in with unprecedented stimulus.
FTSE 100 has broken through 7,000!
That restored liquidity and confidence, and helped drive the stock market rally. The FTSE 100 is up a thumping 40% since then. In the US, the S&P 500 is trading at an all-time high. It seems incredible, given the year we’ve had, so could it all end in a crash?
The obvious, easy answer is yes. Stock markets can always crash, at any time. It’s what they do. Regularly. Investors can get in a tizzy when it happens, but it’s perfectly normal. Looking back, history shows the stock market will typically rally after a crash.
Sentiment is cyclical, too. Many are wary right now. They will see the FTSE 100 surging through 7,000 as a sign that we’re in a bubble, and it’s ready to burst.
My view is that round numbers don’t matter at all. It’s human nature to look out for benchmarks, or breakthroughs, or psychological barriers, but they are meaningless. If the FTSE 100 fell below 7,000 tomorrow, that wouldn’t suddenly make it a worse place to keep my money.
Investors need to ignore short-term stock market rallies and crashes, and look to the long term instead. If you do that, you will see that the trajectory is broadly upwards, albeit with heaps of volatility along the way.
The stock market rally could continue. Or stop
Nobody can predict when the FTSE 100 will break through 8,000 or 9,000, or whether it will plunge back towards 5,000. We simply do not have that information.
So here’s my strategy. First, I invest for the long term. To retirement and beyond! Any money I put into shares will be there for at least 15 years, preferably twice as long. During such a lengthy period I will see many a stock market rally, and many a crash. I won’t get excited about either.
I have to add one proviso here. When stock markets do crash, that’s when I go looking to buy shares, before they rally again. It may sound counterintuitive, but this is when you find the best bargains.
I am also hunting for bargains during today’s stock market rally, because there are still plenty of undervalued shares out there.Â