Updated: 1 September 2020
It’s a question I am regularly asked on radio and TV at the moment. And it’s a good one. If only there were a definitive answer!
Frankly, with the stock market it’s always difficult to know if ‘now’ is a good time to invest. In the current climate the near future is even more uncertain than usual and the only thing we know is that it’s likely to be a bumpy ride for all markets.
However, there are some sensible ways to approach the question of whether to put money into stocks and shares right now that can give one some confidence in making a decision.
Trying to time the stock market is ultimately a fool’s game. Many very clever people have made a career out of trying to find some sort of definitive pattern that anyone can use to spot when the market has bottomed out (and is therefore a good time to buy) and when it has reached its peak (and is therefore a good time to sell). They have all failed. The markets regularly act irrationally and there are often sudden and unexpected events that can materially affect companies that no one could have predicted. So patterns are constantly being broken.
The only way to approach investing in the stock market – certainly for ‘retail’ investors like you and I – is to take a long-term view. Anyway, investing is not truly investing unless you are going to leave your money in a product for at least five years (ideally more), so that the short-term ups and downs of the market are smoothed out and you benefit from an overall increase. People who bought just before a crash did lose out in the short-term, but history has shown that if they went against the trend and kept their money there for a few years, over time they regained what they lost and, after some more time, made profits.
The only people who should be really concerned about whether now is a good or bad time to invest are so-called ‘day-traders’ who buy and sell for short-term profits, sometimes within 24 hours. But that is more like gambling, not investing in the proper sense. For someone like you who wants to make the most of their money and take a profit without losing it all, you should only really be looking at the long-term prospects for the market.
So, if you think that long-term (i.e. after at least five years) the stock market will do well, then now is as good a time as any to put at least some of your money in.
An even better way to avoid timing the market is to drip-feed your money into stock market investments, putting a bit in each month or even each week over the year, rather than depositing a big lump now and hoping for the best.
By putting a regular amount of money in, you benefit from what is called ‘pound cost averaging’ where you buy shares at various points of the stock market cycle. So you end up buying when stocks are cheap, when they are expensive and when they are medium-priced, ending up spending an average price overall. It means you lose out a few times when buying at the higher prices but overall you should do all right.
Frankly this sort of regular investing is probably the best way for most of us to invest in normal conditions, simply because of the impossibility of timing the market accurately. And right now the economic situation, both in the UK and across the world, is so uncertain that, although the market is clearly cheap at the moment, it’s possible that it could get even cheaper in a few months’ time if we get the much-publicised ‘second wave’ of the virus. This second wave, involving another lockdown in this country and abroad could see markets drop again. If you take the plunge and put all your money in now you would feel pretty fed-up next year if that happens.
It’s these uncertainties that tend to paralyse would-be investors and make them keep waiting and waiting for an opportune moment to put some cash in. Deciding simply to drip money in regularly, whatever the state of the market, can help get one out of this stasis and into making money (long-term).
So far I have talked about investing in the whole of the market – something I do a lot through index-tracking funds which are a cheap and straightforward way to invest without having to think too much about it!
Some people might prefer to invest in funds or individual companies from sectors that they think will perform well, rather than going for the whole market. This is by no means certain, of course, and it’s always up to the investor to do the research first and make up their own mind, but it’s worth remembering that there are always companies and individuals that actually do better in a crisis than in normal times.
I have always taken a long view of investing and favour the ‘drip-feed’ method of putting money into the stock market. So I am continuing to invest, mostly in the whole market but also (to a small extent) in a couple of specific sectors. However, I am also looking at other assets to balance this such as property, peer-to-peer lending and, of course, some cash.
Jasmine Birtles is founder of the self-help money site MoneyMagpie.com and regularly runs investment webinars for users of the site.
The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, such information contained here. If you have any questions, please speak to your professional adviser or seek independent specialist advice.