2020 has been an unexpected year and utterly bewildering for the financial markets. The March market crash caused panic all round. But government stimulus and a strong desire to invest has driven some share prices to record highs and others to dire lows. So how do you decide whether it’s a good time to buy or sell shares?
When is a good time to buy shares?
As a long-term investor, timing when to buy or sell is less important than if you’re day trading. Nevertheless, it’s still important to watch how a company is performing now and if it’s likely to prosper in the future.
In a downturn, growth slows and uncertainty prevails, resulting in high volatility in the markets. As we’ve seen this year, it leads to quality stocks becoming overvalued and riskier stocks losing out altogether. To prepare for this, I think you should look for value, quality, and stocks that ordinarily experience low volatility, such as those bigger names in the FTSE 100.
A market crash is a great time to buy because share prices are low. But it can disconcert being the buyer, when everyone around you is panicking and preparing to sell. Today, many of the companies that lost value in March have rebounded spectacularly and may now be overvalued. This means they could tumble in the event of another market crash. However, if you’re planning on holding for many years (I think that’s the best plan) then timing is less important.
Examples that I’d add to a long-term portfolio are Rentokil Initial, BAE Systems, and Tate & Lyle. These are well-established companies I believe will still operate in many years to come. I also like AstraZeneca and Spirax Sarco, but both have very high price-to-earnings ratios. This indicates they’re overvalued, so I’ll keep an eye on them to buy in a dip.
As a long-term investor, when is a good time to sell?
When preparing for a downturn, it may be tempting to sell every stock in your portfolio. Considering the endless doomsday predictions in the media, you’d be forgiven for letting panic set in. But I don’t think a complete sell-out is ever a wise idea. Deciding when to sell isn’t easy, but I believe it’s sometimes sensible to sell stocks.
If you invest in a company you think will grow, keep your investment until you assume it’s grown as far as it can. If you no longer believe it can continue to grow, then that could be a sensible time to sell. The same stands if you invest for dividends and the company then cancels the dividend.
This year has seen an unprecedented number of companies cancel dividends, and I don’t think it would’ve been wise to sell your shares in all of them for this reason alone. Many are trying to save money to see them through the crisis and will reinstate their dividends in time (plumbing supplies firm Ferguson did so this week). However, if you’ve already realised profits and it would give you peace of mind to sell, then by all means that’s an equally sensible decision.
Having a clear investing strategy will go a long way to building your wealth. As share prices fluctuate, your strategy will help you buy or sell your stocks in line with dips and peaks.