How do you feel about your share portfolio right now? If you’re like me, and many other UK investors, you’re probably feeling pretty good at present. The market has been rising, volatility is low and this investing game seems, well, pretty easy right?
However before you decide that it’s time to invest a whole lot more capital into the market, be aware that several indicators are suggesting to me that now might not be the best time to do so, and that a little patience may pay dividends.
Investor sentiment warning
The first indicator that concerns me is investor sentiment. Because right now, it’s at a high level. Indeed, sentiment has reached its highest level since April 2016, according to the latest Lloyds Bank Sentiment index released last week. The index climbed to 6.1%, double the reading of 2.98% this time last year, suggesting that investors are feeling confident despite the uncertainty that lies ahead.
Investor sentiment is a classic contrarian indicator. Often, when investors are in a feel-good mood, it means that it might be time to batten down the hatches. As Warren Buffett insists: “Be fearful when others are greedy and greedy when others are fearful.”
While we’re certainly not in an over-exuberant bull market right now (I haven’t been offered any share tips from taxi drivers recently), I’d still argue that an element of caution is warranted, with Brexit and/or Trump issues likely to cause turbulence at any given moment.
The fear index
Another indicator that concerns me is the Volatility Index (VIX), also known as the ‘fear index‘.
The VIX is a popular measure of investor sentiment and market volatility. When markets are volatile, the VIX level spikes higher and when markets are calm, the VIX reading is low. A reading of 30 or higher is generally associated with high market turbulence, while values of 20 or lower signal a calmer market. So what’s the VIX doing right now?
Unbelievably, despite Brexit and Trump uncertainty, the VIX is trading at a level of around 12 at present. Make no mistake, this is an incredibly low level and suggests that markets are in a complacent, over-confident mood. While markets seem to be unconcerned about the ‘known unknowns’ such as Brexit and Trump, the question is what will happen when an ‘unknown unknown’ springs up?
Plan of action
So what’s the best plan of action? Private investors often make the classic mistake of investing too much at the top of the market. They feel that investing is easy because the market is rising and overcommit at precisely the wrong time. Been there, done that.
The key is to think like Buffett and wait patiently for opportunities, so that when others are ‘fearful’, you have the resolve and the capital to be ‘greedy’. Investing like this can make a huge difference to your long-term returns.
One sensible idea is to have some cash available on the sidelines. This way, if volatility suddenly arises, and those high-quality companies you’ve been dreaming about owning drop 10%-15%, you can buy them at more favourable prices. So that’s what I’m doing right now – stockpiling cash so I’m ready to capitalise when volatility strikes.
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