Despite this article’s headline, it’s very hard to time the markets and whenever you invest, you’ll usually see some down-days as well as up-days.
But if the recent carnage in the stock markets has whetted your appetite for investing, I think there’s a good chance you’re thinking ‘right’ about the process. After all, it’s probably better to begin your participation just after the speculative froth has been blown off share prices.
Buying good value
Indeed, one of the main points of value investing is to not overpay for shares. And when everything looks rosy in the economic garden and the markets are riding high, valuations will likely have been pushed up too. And the best time to buy shares and share-backed investments is when the earnings multiples are lower.
Otherwise, you can end up identifying good-quality underlying businesses, which go on to make poor investments for you as a shareholder. That’s because you paid too much for the shares as measured by earnings multiples and other valuation indicators. The main problem with overvaluation is that it tends to correct over time, which can stymie your returns from shares.
Let me tell you a little story about my own entry into active investing nearer the beginning of the century. I’d participated in a clutch of privatisation issues through the 1990s without really knowing much about shares. Thankfully, those investments proved to be profitable. And when I found myself with a lump sum to invest, the markets were just beginning to recover from the big bear market that finished around the end of 2002.
One of my first investments proved to be successful. I put some money in a low-cost, passive FTSE 100 index tracker fund. Over the following months and years, it went up and up, as well as paying me a regular and rising stream of dividends. I’d chosen the accumulation version of the fund, which ensured that the dividends were automatically reinvested to compound my gains.
Drip-feeding looks like a good idea right now
If you look at a chart of the FTSE 100 index, you’ll see that it has so far always recovered from its dips. And I’m sure it will do so again. Furthermore, the long-term trajectory is up. I think the index is an excellent vehicle for playing the recovery from a bear market.
But while the markets look like they are still plunging I’d be careful about investing my cash. I think drip-feeding money into a tracker fund is a good way to proceed. Such pound-cost averaging will help to smooth out your returns in the long term.
And once you’ve started, why not make a regular monthly investment programme something you keep doing until you retire? If you do that, there’s a good chance you’ll be able to retire more financially comfortable than you would otherwise.