Some parts of the stock market have been doing well lately. The FTSE 100 index of leading shares, for example, has climbed 5% in the past 12 months and sits within 5% of the highest level it has ever reached. By contrast, the FTSE 250 is 15% cheaper than it was this time last year.
Given that, if I had a spare £500 to invest today, what would I do?
Perils of stock market timing
One option would be to do nothing. I could sit on the money and wait for the stock market to crash, so I could buy cheaper. There are economic challenges like inflation and the threat of a recession that might push it down badly in future.
Then again, that may not happen. If it was easy to time the market accurately, I expect almost everyone would do it. Instead, I prefer to look at individual shares and see if they offer me value at any given moment in time, rather than trying to invest by guessing at what the stock market overall might do next.
Focus on value
To find that value, I would focus on individual companies. Even an expensive market can still contain bargain shares, just as a cheap-looking market can disguise overpriced ones.
When looking for value, two key factors are in my mind. First, does the company have a competitive advantage that can help it make profits in future? Second, are its shares attractively priced?
Consider specialist engineer Spirax-Sarco as an example. Its business model and customer relationships mean I think it could be highly profitable in future. But its valuation does not look attractive to me, with the shares trading on a price-to-earnings (P/E) ratio of 36.
By contrast, miner Ferrexpo has a P/E ratio of just four. But its business does not appeal to me because of the political risks involved, which I think could hurt revenues and profits.
Instead, I am looking to buy shares in companies like JD Sports, which combine what I think is a highly competitive business model with an attractive valuation right now.
Investing £500
But what if I am wrong about JD? After all, its share price has fallen 32% in the past year.
If I am wrong, the impact of a bad move on my portfolio will be reduced if my investments are diversified. That is why, if I was investing £500 with no existing portfolio, I would always make sure I bought shares in a range of companies operating across different industries.
After that, I would sit back and wait. I believe in long-term investing. Whether or not the stock market continues to perform strongly, hopefully over time I can benefit if I have bought shares in great companies trading at attractive valuations.