A young person I know started his first Stocks and Shares ISA this year. Does a falling stock market put him off?
Nope. “Wow, look at how far Persimmon has fallen, I’m having some more of that,” is his attitude.
He has a lifetime of investing ahead of him, and he wants shares to fall so he can buy more of them. You know, like that well-known not-so-youngster, the billionaire investor Warren Buffett.
One of Buffett’s most famous questions asks: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?“
The answer seems obvious. But then he has a follow-up question: “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?“
Many investors get that part wrong. They’re going to be net buyers of shares, so they should want lower prices. But they cheer when stock markets rise.
Buy when they’re selling
That’s why I think now is a brilliant time to start a Stocks and Shares ISA. It’s because City folk are panicking over falling share prices.
They’re rushing off to buy things like gold, a completely non-productive asset. And bonds, which history shows have been soundly beaten by shares over the past century and more.
At the time of writing, the FTSE 100 has slumped well below 7,000 points points. It’s like all those cheap shares that we missed before the market started picking up in 2021 are back on the bargain shelves.
If (and it’s an ‘if’ that I’ll come back to) the UK stock market should rise over the coming decades, it’s surely better to stash some shares in a Stocks and Shares ISA today than it was when they’re were more expensive a year ago.
Dividends too
And there’s more to it than the simple fact that we can buy more shares for the same money. We also get to lock in higher effective dividend yields.
Suppose a share sells for 100p and pays a dividend of 5p per share. That’s a yield of 5%. But if the share price falls to 80p for no other reason than the market is down (and the company itself is unchanged), that 5p dividend will now provide a yield of 6.25%.
What’s more, any shares we buy today at 80p will carry on providing that 6.25% yield every year we own them, assuming the 5p per share remains unchanged.
Will shares rise?
But back to that ‘if’. We should benefit if UK shares rise in the long term. But will they? Well, we can’t guarantee that. Yet historically, UK shares have returned almost 5% above inflation per year, on average, for more than 100 years.
That’s unlikely to happen this year, with inflation at around 10%. But in the long run, I reckon the chances must surely be high.
I think the best time to start a Stocks and Shares ISA is always now. But I’d say the current now is even better than usual.