I wouldn’t blame you for being somewhat reluctant to invest at the current time. Toppy valuations following a seriously long bull market, combined with nerves surrounding just what the outcome of Brexit negotiations will be, give the impression that you’d simply be throwing your cash at equities at the wrong time. Keeping your powder dry also gives you the opportunity to pounce on carefully selected targets as and when the next general market panic arrives.
There is such a thing as being overly cautious, however. Here are three reasons why continuing to buy at least some stock at the current time could still be a good idea.
1. Time in the market, not timing the market
While we can be fairly certain that markets will crash at some point in the future, no one knows where they’re going over the short term. That’s right, no one. The FTSE 100 at 8,000? It’s still possible.
This is why many experienced market participants are aware that staying invested and allowing your wealth to compound is preferable to attempting to jump in at the bottom (or leave at the top).
To be clear, you can invest at the height of the bull market and still make a lot of money. As US blogger Ben Carlson commented, someone who began investing with $6,000 in 1972 — and only invested at market peaks (e.g. December 1999, October 2007) — would still be a millionaire in 2013, assuming he/she never sold, held a low-cost fund that tracked the market and saved diligently in the run-up to pulling the trigger.
2. Benefit from pound cost averaging.
If we take it as read that no one knows the future for certain then it makes sense to gradually drip-feed money into the stock market rather than withhold it altogether.
This strategy — pound cost averaging — helps to smooth out the bumps in returns. Assuming you routinely invest the same amount, this simply means buying less of something when the price is high but more of the same thing when its value dips.
Another positive to investing on a regular basis is that it can be far cheaper. Whereas a single purchase on a random trading day usually involves paying the maximum commission that your stockbroker can charge, regular investing can be done for just £1 a month.
Costs add up over time. Minimise these as soon as possible in your career and reap the benefits at the finish line.
3. Receive (and reinvest) dividends
A final argument for continuing to invest at least some of your cash relates to dividends.
Let’s use Lloyds Bank as an example. The FTSE 100 behemoth is currently forecast to yield a stonking 5.6% in 2018. Compare that to the paltry 1.35% you’d receive keeping your cash stashed in the best instant access Cash ISA. Yes, you’re paid to take on more risk but, with Lloyds already trading at 8 times forecast earnings, it’s not unreasonable to suggest that a lot of this appears priced-in.
Moreover, the fact that the payout is expected to be covered twice by profits suggests that the likelihood of these being cut soon is slim. Even if they were, owning stock in 15-20 companies (or some income funds) should ensure that you’re protected if a few encounter problems.
A final bonus: reinvesting dividends when markets are struggling also means better returns once the latter inevitably recover.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.