Right now, many investors are asking the same question – is now a good or bad time to invest in the stock market?
It’s easy to see why. At present, many stocks are cheap. However, at the same time, economic uncertainty is sky-high.
Complicating the matter is that, as a result of the jump in interest rates, bonds and savings accounts now offer some competition for stocks.
Here, I’m going to provide my take on the question.
When is the right time to invest?
It’s never easy to work out whether now’s a good time to invest in stocks. That’s because the stock market is notoriously unpredictable.
For example, at the start of this year, many experts were expecting market weakness. Instead, we saw a powerful rally, driven by interest in artificial intelligence (AI).
However, what I do when it comes to working out whether it’s a good time to invest, is use a very basic rule of thumb (it’s about as non-technical as you can get) I’ve developed over the years.
This is how it works. If investing feels really easy, and everyone is making money, then it’s probably not a good time to invest in the stock market.
Conversely, if investing feels really challenging, and investors are in a state of frustration/despair/panic, then it probably is a good time to invest.
This rule of thumb isn’t foolproof. But it tends to work pretty well.
For example, if having invested in the stock market during the Covid-19 crash of March 2020 – when investing felt truly awful – it would most likely have led to success.
However, having piled into the market in late 2021, when share prices were surging and investing felt really easy, would have most likely led led to a crushed portfolio over the next 12 months.
The state of the stock market today
Now it doesn’t feel like March 2020 right now. But at the same time, investing doesn’t feel easy.
Recently, the FTSE 100 index fell back to near 7,300 from 8,000 in February. Meanwhile, in the US, the S&P 500 and the Nasdaq fell into ‘correction’ territory last month (a 10% pullback from recent highs).
At individual stock levels, damage has been much worse in many cases. We’ve got blue-chip Footsie stocks down by double-digit percentages this year.
As for UK small-caps, many are down 50%+ from their recent highs.
Overall, investing has felt pretty challenging in recent months. So my rule of thumb would probably point to it being a good time to be investing.
Investing in this environment
As for the issue of bonds and savings accounts, the investment landscape has no doubt changed over the last six months. As a result of higher interest rates, it’s now possible to pick up decent rates of return (eg 4-6%) with basically zero risk (ignoring inflation).
Given this change in the landscape, I think it could be worth considering taking more of a high-growth/low-risk ‘barbell’ approach to portfolio management.
By investing some capital in bonds and savings accounts (and earning that 4-6% with minimal risk) and some capital in high-quality growth stocks that have the potential to rise 20%+ in a year (The Motley Fool could be a good source of ideas here), investors should be well-placed to generate attractive returns, in my view.
