According to CNBC on Tuesday 3 March, Ari Wald, an analyst from Oppenheimer, the US-based full-service brokerage and investment bank Oppenheimer, thinks the S&P 500 index is “only in stage two of a three-stage sell-off.” And I reckon where the US markets go, the UK markets are bound to follow.
He reckons bottoms in the markets tend to “play out in three stages.” Firstly, we often see a high-intensity low, which Wald thinks we had last Friday. Then, we can experience an oversold bounce, and Wald reckons we could be “in the process of that.” But it could last for days, or even weeks, he said.
A re-test of the lows?
Ominously, the third stage, according to Wald, is a re-test of the initial low. To me, the implication is that the test may succeed, and the low will hold. Or it may fail. In which case, I reckon we should hold onto our hats because the markets could drop fast.
But technical analysis has its limitations. Although I do believe it’s at its most useful during uncertain periods like this. Indeed, our assumptions about the fundamentals supporting the companies behind our share investments are being challenged. COVID-19 still has the potential to change everything.
However, for those with a regular investment programme, I think the way ahead is the easiest to manage. Keep investing consistently every month, I reckon. If you’re investing in the shares of companies with good-quality underlying businesses, you’ll be likely getting more for your money if share prices fall further.
Likewise, passive investors contributing regularly to index tracker funds are well placed. The pound-cost averaging effect will likely serve you well if you keep on investing. The lower your index falls, the more units you’ll be getting for your money.
And when the markets ‘normalise’ again, those contributions at the lows will help to turbocharge your investment going forward. Especially if you’re using the Accumulation version of your fund, which will automatically reinvest the dividends.
Regular reinvestment into the stock market is what gets your investment compounding, and the process of compounding is key to building wealth. And you can also use those two powerful tools of pound-cost averaging and compounding with managed funds, run by a fund manager or a team of professional managers.
If your new to investing and have yet to invest your first pound, ‘right now’ is a good time to start. But while you’re learning about strategy, maybe it would be a good idea to start off by regularly investing in low-cost, index tracker funds, such as those that follow the FTSE 100 index, the FTSE 250 and America’s S&P 500.
Over time, regular index investors can do well in the markets. And while you’re doing it, you can expand your knowledge by hanging around financial websites such as The Motley Fool UK. Good luck in the markets!
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.