Is now a good time to invest in stocks? That’s the question many people are asking as we begin 2019.
But there’s no easy answer, unfortunately. Both economic and political uncertainty are high right now, and the FTSE 100 has fallen around 6% over the last three months. If uncertainty remains elevated, there’s a chance it could fall further.
That said, from a long-term investing point of view, I believe there’s a valid case for buying stocks at the present time. Here’s a look at three reasons why now could be a good time to invest.
Valuations are lower
Since hitting an all-time high in May last year, the FTSE 100 has fallen around 13%. That means stocks are now considerably cheaper than they were back then. For those looking to accumulate stocks for their retirement portfolios, that has to be a good thing, right? Would you rather pay full price for something or receive a 13% discount? Essentially, investors can buy considerably more stocks for their money right now.
Moreover, the overall valuation of the FTSE 100 index appears to be quite reasonable now after its recent pullback. According to Stockopedia, the median forward-looking P/E ratio of the FTSE 100 is just 11.7. That’s certainly not an expensive valuation judged on a historical basis.
Dividend yields are high
Another reason that now could be a good time to buy stocks is that dividend yields are high. When the market was at its all-time high last year, lofty yields were harder to come by. However, right now, there are a ton of companies in the FTSE 100 that offer fantastic yields. In fact, according to Stockopedia, there are currently 37 stocks in the key index that offer a rolling one-year yield of 5%, or higher. In other words, nearly two-in-five stocks offer a yield of at least 5%. And incredibly, nearly a quarter of the stocks in the index offer a rolling one-year yield of 6%, or more.
In my view, these high yields offer a brilliant opportunity. We often hear how the stock market can generate total returns of 7-10% per year over the long run yet, right now, FTSE 100 investors can pick up returns of 5% or 6% per year, or more, from dividends alone.
Uncertainty is high
Finally, as I mentioned earlier, uncertainty is high right now. That includes Brexit, trade wars, higher interest rates, and a number of other factors. Investing feels challenging and, as a result, investor confidence is generally low. Some people have even said that the UK is ‘uninvestable’ due to the uncertainty that exists over Brexit.
In these situations, I think it’s worth remembering this top quote from the greatest investor of all time, Warren Buffett: “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” In other words, the best time to invest is often when others are selling. It’s not easy to buy when everyone is selling, but it can definitely pay off over the long run.
Of course, because uncertainty remains elevated, I wouldn’t recommend going ‘all-in’ in stocks right now as the stock market could fall further in the short term. To my mind, the best strategy is to drip-feed money into the market, taking advantage of compelling opportunities when they arise.
