It has been a lively few weeks in the stock market. The summer holiday now feels a long time ago, as professional traders try to understand the economic impact of everything from a recession to exchange rate swings. That might make it seem like a bad time to start investing. But in fact I have bought a variety of shares recently and see it as potentially a great time to build my portfolio. Here is why.
Share valuations and business prospects
Buying a share is like purchasing a tiny sliver of a business. As we have seen lately, share prices can go up and down in a short period of time, sometimes dramatically. But is the same true of the underlying business value?
In some cases it may be. For example, an estate agency such as Rightmove might see transactions fall sharply if the housing market slows down. That could be bad for revenues and profits.
But for other companies, a worsening economic environment may not affect their business prospects much. For example, I own shares in tobacco firm Imperial Brands. Although long-term demand for cigarettes is falling in many markets, I do not expect a recession to dent demand heavily. Indeed, the company seems confident about its outlook, announcing a £1bn share buyback last week.
However, market volatility can drag down the price of shares in companies that might not be much affected by a recession. If I was new to the stock market, that could be as good a time as any for me to start investing.
Potential perils of market timing
The alternative would be for me to try and time the market. In other words, I could wait until I thought shares had reached a bottom, then pile in, anticipating price gains.
But I see a couple of big problems with trying to take such an approach. The market is not predictable – if it was, many investors would time it. In reality, nobody ever knows for sure what will happen and when.
On top of that, there is a difference between market movements as a whole and the ups and downs of an individual share. As I am hoping to buy individual shares that I reckon have good long-term prospects, waiting in the hope of the market falling might not help me. Even if the overall market heads south, the shares I like might actually have become more expensive while I wait.
I’d start investing when I found a great share
That is why, instead of trying to time the market, I would simply look for what I thought were great shares selling at an attractive price. When I found such shares, I would be ready to start investing – whatever the wider market was doing.
Many UK shares have fallen in price lately. That means some shares I already like, such as Dunelm and JD Sports, are now more cheaply priced than they were before. I have been taking advantage of that to build my portfolio.
