Take a look at the business pages, and it’s not difficult to see that stock markets are in turmoil, repeatedly registering falls or rises of 2% or so.
And when waters are this choppy, many ordinary retail investors are reluctant to dip a toe in — especially with a market that’s down over 20% from its April 2015 high of 7,104. Better to wait, they argue, until the storm has passed.
Well, that’s one way of looking at it. But again and again, studies show that it’s investing over the long term that delivers the greatest gains. Wait until the storm has passed, and the odds are good that the market will have already risen a fair way, leaving you empty-handed. (Just ask those people who sat on the sidelines in the spring of 2009.)
So what to do, if you’re one of those readers sitting on the sidelines? Well, here’s three reasons why investing right now might make sense.
Tax shelter
Are you a higher-rate tax payer? Might you stray into higher-rate tax this year? If your earnings are anywhere near — or above — £42,385 this current tax year, then the answer is likely to be ‘yes’.
Make an investment in a SIPP pension, though, and (for most people) every £1 invested is a pound sheltered from higher rate tax. A £5,000 investment in a SIPP, for instance, shelters £6,250 from higher-rate tax.
But you’ll need to find the cash before April 5th, and invest it before April 5th. And some observers are advising making the investment before the March 16th Budget, just in case the Chancellor makes changes to the tax relief rules.
So time is of the essence. Make a long-term investment in the stock market — and improve your prospects in old age, as well as reducing your tax bill this year.
Bargain basement prices
Markets are down. Last Thursday, for instance, the FTSE 100 came close to breaching the 5,500 barrier, only to rise strongly over the next two days’ trading.
5,500 might be as low as this downturn gets, despite the commentators in the weekend press predicting further slides. Yet the simple fact is that no one knows for sure where the market will go over the next few months.
And even if the market does go further south, it’s fairly clear that a market that has fallen to 5,500 from 7,104 in April 2015 is a market that’s trading at a very juicy discount to prices that were obtainable less than a year ago.
True, it could head further south — but market timing is very, very difficult. And there’s nothing wrong with locking in a bargain at today’s levels. Again, just ask those people who sat on the sidelines in the spring of 2009.
Long-term growth
The third reason why waiting until the storm passes might not be such a good idea is that no one knows how long you’d have to wait for the storm to pass.
Quite apart from missing out on any gains that the market makes before you decided that it was safe to invest again, you’re missing out on the long-term gains that would be made by the money you invest today.
Let’s say that you’re thinking of investing £250 a month into the stock market, but you’re going to wait for calmer conditions first. And let’s further suppose that those calmer conditions don’t arrive until this time next year.
Assuming a 9% long-term average annual investment return, then that £250 a month would have grown to £16,813 after 20 years. Which is £16,813 that you’ll have missed out on by waiting for those calmer conditions.
Moreover, investing when markets are troubled — as now — means getting in at cheaper prices. Buying when the FTSE is 5,500, or buying when the FTSE is 6,000 — or even higher? I know which I prefer.
Weighing it up
Roll it all together, and I believe that there’s certainly a case to be made for investing in today’s market.
It might not be comfortable — and markets could turn tail and head further south — but the long-term performance of equity investing is hard to beat.
And, just as a journey begins with a single step, the long term starts today.
