The stock market crash: should you invest now?

The bottom of a stock market crash is the best time to invest, writes Thomas Carr.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As the stock market crash continues, it’s a sobering reminder that stock markets are basically just measures of investor sentiment. They reflect the future expectations of investors. That is, their expectations of economic performance and more specifically of individual businesses.

Share prices rise when investor sentiment improves and fall when it deteriorates. When share prices swing abruptly, it’s an indicator that sentiment has changed very sharply. Likewise, when share prices are only moving one way (as in a stock market crash), it shows that sentiment is firm and that investors have strong convictions.

Clearly, investor sentiment is currently very poor. In fact, it’s about as bad as I’ve ever seen it. It certainly seems a lot worse than it was during the depths of the financial crisis. Even more worrying is the fact that we don’t know how much worse things are going to get.

Bulls and bears

Investor sentiment alternates between being bullish and bearish, mostly operating between the two. Sir John Templeton – one of the most successful investors – famously said that ‘’bull markets are born on pessimism, grow on scepticism, and die on euphoria’’.

It follows, that it’s better to invest in periods when sentiment is poor, than it is in more bullish times from a long-term performance point of view. This is mainly due to valuations.

Worsening expectations result in lower share prices and lower valuations (how much investors have to pay to own a share of a company’s profits). This is significant because valuation is the biggest indicator of future long-term performance.

From this, we can also understand that the very best time to buy is when sentiment is at its very worst. In fact, the best time to buy is when the prevailing opinion is that things can’t get any worse, that economies and businesses are set to be destroyed.

Where is the bottom?

When sentiment is at its worst, the only way for stock prices is up. This point represents the bottom of a stock market crash. After this point, either future expectations improve, or valuations become attractive, bringing investors back into the market.

Of course, it’s impossible to time the market perfectly and buy at the very bottom of a stock market crash. What’s more, at times like these, it also seems impossible to predict which way sentiment is going to move next.

But what we can do, is acknowledge that stock markets are unusually cheap, and that sentiment is atrocious. From this we can then determine that any return to anything approaching normality will likely lead to positive investment returns. This is especially the case when competing investments, such as bonds and savings, offer such poor rates of return.

However, given that both stock markets and expectations are on a sharp downward trajectory, there’s clearly a degree of risk in investing now. This is why, instead of investing one lump sum right now, I plan to slowly drip-feed it into the market, over a period of weeks or even months. This approach might not offer the best returns, but it will surely help me to sleep better at night.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The Legal & General share price has gone nowhere. Why?

The Legal & General share price has performed much worse than the the FTSE 100 over the past five years.…

Read more »

Investing Articles

Where will the BT share price go in the next 12 months? Here’s what the experts say

The BT share price has been sliding for years. But after the latest set of results, it looks like the…

Read more »

Investing Articles

Are National Grid shares now a brilliant bargain?

National Grid shares look exceptionally cheap following last week's selloff. Is now the time to buy the FTSE 100 firm…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Up more than 15%! — this small-cap company is delivering phenomenal dividend growth

There’s more good news in this company’s interim report and it may be shaping up as a decent dividend growth…

Read more »

Electric cars charging at a charging station
Investing Articles

Big news for Tesla stock investors!

Tesla has just quietly dropped a key target it set for itself just a few years ago. What does this…

Read more »