With global stock markets falling a long way in the first quarter of 2020, many people are wondering whether now is a good time to buy shares. Buying low and selling high is the key to making money from stocks. So has a major wealth-creation opportunity emerged?
In my view, it’s a good time to be putting a little bit of money into shares. That’s assuming you’re willing to invest for the long term. Having said that, I expect stock market volatility to remain high in the near term. So a cautious approach that focuses on both risk and reward is sensible.
Is now a good time to invest in shares?
One reason I believe it’s a good time to buy shares is that economic uncertainty is elevated right now. If you’re a long-term investor, that’s a good thing. Uncertainty translates to lower stock prices which, in turn, translates to more potential for profit.
As the world’s greatest investor Warren Buffett says: “You pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”
Secondly, fear levels have been very high recently. Last month, the CBOE Volatility (VIX) index, which is often called the ‘fear index’, spiked up to a level not seen since the Global Financial Crisis. For long-term investors, high levels of fear within the market’s investment community can create amazing buying opportunities. To quote Warren Buffett again: “Widespread fear is your friend as an investor because it serves up bargain purchases.”
A third reason I believe it’s a good time to buy shares is that many professional money managers have been buying recently. For example, Terry Smith, who’s sometimes referred to as ‘Britain’s Warren Buffett’ due to his incredible performance track record, has said he’s been adding new stocks to his fund during the recent sell-off. Similarly, Nick Train, who’s regarded as one of the UK’s top stock pickers, has said he’s also been buying stocks in the sell-off. If the pros are buying shares now, it’s a good sign, in my opinion.
Focus on risk as well as reward
Of course, the coronavirus crisis could potentially get worse before it gets better. This means stocks could fall further from here. In the past, bear markets have taken a while to play out, with stocks briefly rallying at times before falling again.
So, my advice, if you believe it’s a good time to buy shares, is to:
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Invest in high-quality companies with strong financials that are likely to be resilient in an economic downturn.
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Diversify your money over many different companies to lower your stock-specific risk.
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Drip-feed money into shares over time. That way, if the stock market does continue to fall, you’ll be able to snap up some shares at lower prices.
By focusing on risk, as well as reward, you’ll give yourself the best chance of profiting when uncertainty dissipates and the stock market rallies.