Fool's Eye View

[ October 6, 2000 ]

Is Now a Good Time to Invest?

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- It's been a pretty depressing year for stock market investors. The FTSE100 index closed out the 20th Century at 6930 and today it is hovering around the 6393 level, a fall of almost 8%. Falls of this sort always make investors, new or old, nervous. They show that markets can go down as well as up.

One of the questions we get asked time and again is, "Is now a good time to invest in the market?" We were asked this question the day that the Motley Fool opened in the UK and we may well be asked this question as long as the Motley Fool exists. It is a very sensible question. Over the last year, the market has had a roller-coaster ride, and big profits could have been made if we could have sold out our holdings at the top and then reinvested at the bottom of the market. The problem is judging when the market is at a peak and picking the bottom.

We seem to be in a period of significant market instability. One day the market is up 200 points, the next it is down 250 -- and I can hear the bears starting to rumble again. So, is now a good time to invest (or be invested) in the stock market?

This is one of the biggest challenges most investors face. Trying to make sense of the masses of news, trying to work out if this or that is a signal to buy or sell. The concept is called market timing and if you have visited this site before, you might well know my thoughts on market timing: it can't be done. If you are speculating in the market, if you are a day trader (or even only a month trader) then I am sure that you feel the need to pay attention to interest rates and reports that you feel may move the market one way or the other, but even then I am sure that you can not predict the way the market will move to any particular item of news. However, if you are a long-term investor (the most successful strategy for average investors, by the way), then I wouldn't pay much attention to all the noise that you hear. The sooner you start investing, the sooner you'll be on the road to being a Fool and the financial freedom that will eventually bring.

At the end of 1998, that very Wise organisation Fidelity Investments published research that showed that investors who had stayed fully invested from 1st January 1986 to 31st December 1997 with dividends reinvested would have seen their investments grow by nearly 15% per annum. However, if they had missed the 40 best days during that 11-year period, their investments would have grown by only 5% per annum. Just think how easy it would have been to miss those 40 best days through trying to time the market.

Jumping in and out of the market can seriously damage your wealth. Not only do you incur extra commission charges, but you also risk getting the timing wrong. Remaining fully invested would have produced a better return than trying to pick the best time to be invested and jumping out of the market when you thought a downturn was coming. Trying to predict movements is impossible.

Holding 100% of your investments in the stock market requires a long-term view. There is no point being fully invested in the market if you find that the exposure is making you worry. Life is more important than that. Fools believe that it is vital for you to save for your future and that, over the long term and approached in the right way, shares are the best and safest vehicle for your savings. But investing should also be fun. If you are uncomfortable with the exposure that you have to the stock market and are losing sleep over it, sell until you reach a level that you are comfortable with -- what Jim Slater calls "your sleep level."

But don't forget that if you look at a long-term graph showing the returns achieved by investing in shares, you will see that it shows a distinct trend from the bottom left to the top right. There are a number of up and down movements along the way, but even the big downward move in 1987, when the stock market lost over 30% of its value in a month, now looks like nothing more than a small blip -- indeed, it is almost unnoticeable. Even if you had been unfortunate enough to invest all of your money in 1987 before the crash, it would have taken only two years before you recovered your money. £1000 invested at the peak in 1987 would now be worth around £4,700, an annual growth rate of about 12% per year -- a significantly better return than you would have got from the building society over that same period.

There will always be ups and downs in the market, but research has shown that over 5-year or 10-year periods, shares outperform deposits in building societies over 80% of the time. In the past, investors who have taken the long-term view and stayed invested are the ones who have achieved the best returns.

Where next?

• Is the Queen Mum a Fool?
• The Queen Mum's millions.
• The ten Foolish steps to investing.
• CSFB Equity-Gilt Study.