With stock markets experiencing sharp falls, many people are currently wondering whether this exact moment is a good time to invest in shares. This isn’t surprising. After all, buying low and selling high is the key to making money from shares.
Here, I’m going to provide my take on the issue. Should I add to my portfolio, or hold off on buying for now?
Buy the dip?
Let’s start by looking at the facts. Right now, many major stock market indexes are well below their all-time highs. For example, the S&P 500 – the most influential index globally – is currently about 25% below its all-time high. The tech-focused Nasdaq 100, meanwhile, is more than 30% off its all-time highs.
Here in the UK, the FTSE 100 has held up quite well, due to its energy exposure – it’s only about 10% below its all-time high. But the same can’t be said about the FTSE 250. It’s currently about 30% below its highs.
Generally speaking, buying stocks after 20%+ index declines has paid off in the past (for those with patience).
Turning to valuations, these seem quite reasonable after the recent market falls. Here are the current median forward-looking P/E ratios for the four indexes mentioned above:
- FTSE 100: 11.7
- FTSE 250: 11.2
- S&P 500: 15.6
- Nasdaq 100: 19.2
Looking at these valuations, stocks seem attractively valued (although the Nasdaq 100 multiple is still a little high). This leads me to believe there could be some value on offer for me right now. Having said that, these multiples assume that corporate earnings (the ‘E’ in P/E) hold up over the next year.
Warren Buffett’s rule
What about fear levels in the market? Billionaire investor Warren Buffett says that the best time to buy stocks is when others are fearful.
Well, a good way to assess fear is to look at the VIX index (aka the ‘fear index’). Currently, it’s above 30, which is quite high, suggesting fear levels are elevated. So, going on Buffett’s advice, it could be a good time for me to buy stocks.
My investing rule
Finally, I want to discuss an investing rule of thumb I use. Over the years, I’ve learned that the best time to buy stocks is when investing feels really challenging.
It’s fair to say that investing feels challenging right now. This year, many stocks have tanked. And with so much economic uncertainty, it’s hard to be optimistic about the stock market. So it could be a good time for me to invest.
Downside risks
Of course, we also need to consider the risks here. Is there anything that could cause share prices to fall further? Absolutely.
Higher-than-expected interest rate hikes from the Fed and the Bank of England, persistently high inflation, lower consumer spending, a full-blown recession… these are just some of the factors that could result in further market weakness going forward. So buying shares now is not guaranteed to pay off.
A good time to buy stocks?
However, weighing everything up, my view is that it’s a good time to be putting some of my money into the stock market. I’m not going to invest all my spare cash right now, because share prices could potentially fall further from here.
But I think it’s worth having a nibble at current levels. So that’s what I’ll be doing in the weeks ahead.