Too many people seem permanently bearish about the stock market and obsessed with timing their entry and exit.
What's the most dangerous thing about the stock market? In my view, it's not being invested in it.
This horrifies many people. You see, as far as the markets are concerned there is always something to worry about. So, especially if you're determined to find one, there is always a good reason not to invest.
Right now, it seems there are even more things to worry about than normal. We have higher interest rates potentially causing a slowdown in the economy. Then there's rising oil prices, the threat of more terror attacks and so on.
Another reason that's panicking some people is the fact that the stock market has been on an upwards trend for over four years now. Although it's remained broadly flat for the last three months, the FTSE 100 index has doubled from the low point it set in March 2003.
But the market is not expensive...
While it is unusual for the stock market to have such a good run of form, it is not unprecedented. Additionally, just because something has risen in price does not necessarily mean it's expensive. In fact, looking at one value measure in particular I reckon the UK stock market is reasonably cheap right now.
The p/e ratio of the FTSE 100 is currently 12.4. The broader market, as measured by the FTSE All-Share, is marginally pricier. But, at 13.3, I still don't see it as being overpriced. Fair value at the moment, in my view, would be about 15 or 16.
Profits are generally predicted to be moving in the right direction too. Of the top ten companies in the FTSE 100, only two are predicted to see a fall in profits over the next couple of years - Royal Dutch Shell
(LSE: RDSB)
and Anglo American
(LSE: AAL)
are the miscreants.
The fly in the ointment, as Maynard Paton pointed out last week, is that dividend yields are fairly low compared to what's on offer from less risky assets like cash and bonds. The FTSE 100 is yielding 2.9%. Again the broader market offers slightly less value, with the All-Share yielding 2.7%.
Perhaps, being the naive optimist that I am, I don't see this as all bad news. Companies are paying out a relatively low proportion of their profits right now - just over a third of them in fact. So although yields are low, there is plenty of room for increases in future.
For the avoidance of doubt, I'm not predicting the next step for the market will be up. What I do think is that, based on these admittedly simple measures, the prospects of a decent rise from this level over the next three to five years are pretty good.
How I time the market
My preferred method of timing the stock market is different from most. I expect to be a net investor for many years to come, so I don't think in terms of diving in and out. My existing investments stay in the market so the main issue I have is when new money should go in.
Normally the answer is as soon as possible. It's only when the market gets really expensive that I'm tempted to hold off from investing any new money, waiting for a better opportunity. Even then I would be loathe to yet a year go by without using my ISA allowance.
How expensive would the market need to get? In the current climate, I'd say the market's P/E would have to above 20 before I held off adding new funds into index trackers. That seems a long way off at the moment.
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