Stock markets have been navigating difficult times. With gloomy economic trends and growing political risks, there is a lot of uncertainty over what might happen next to share prices. At a time like this, I could either invest my spare cash in my Stocks and Shares ISA now or hang onto it in the hope of snapping up bargains a few months from now.
Here is the approach I use when deciding whether to invest at a given time.
Market timing
The idea of waiting for the stock market to get cheaper is an example of what is known as ‘market timing’. The concept is that investors can buy shares when they are priced cheaply and then sell them later when the market goes up.
Clearly, there is a logic to that. But, in practice, I see some difficulties with using this investment strategy. One of them is that nobody knows what will happen next in the stock market. So trying to time the market can be laden with risks.
Sometimes, economic conditions look strong but an unexpected event can lead to share prices plummeting. On other occasions, a lacklustre market can suddenly spring into action, with prices moving up faster than many investors expected.
On top of that, what we call a stock market is really a market of individual stocks. So just because the overall index moves up does not mean individual shares will do well. By the same token, a market crash might coincide with some shares doing very well.
So instead of thinking about timing the market, I prefer to focus on the merits and risks of individual shares when weighing up whether to own them in my Stocks and Shares ISA.
Buying parts of businesses, not shares
That reflects my wider investment philosophy. Like billionaire investor Warren Buffett, I do not think simply in terms of buying shares. Instead, I consider buying a share as an opportunity to own a tiny part of a business.
That means simply buying when a share price is low or selling when it is high makes little sense to me. Instead, I try to consider what sort of long-term value a company can create for shareholders. Then I look at its share price and consider whether it offers me an attractive entry point to the company.
So, for example, I have been buying shares in Direct Line. If I waited a few months and the market crashed, could I buy them cheaper? Maybe – but nobody knows for sure. Meanwhile, I think the current price looks attractive to me for the long-term value I see in the insurance group.
Instead of worrying about whether I can get a share I like a little bit cheaper if I wait to buy it, I simply consider whether I think the current price is attractive, based on how I see the future prospects of the business. If I do, I see no reason to wait before investing, even in current market conditions.