Global stock markets have plummeted in recent weeks due to the economic uncertainty associated with the coronavirus. And one question I’ve been asked a lot is whether now is a good time to invest. Stock valuations are now considerably lower than they were a month ago. Understandably, many people are wondering if a major opportunity has presented itself.
Personally, I do think that a fantastic investment opportunity is emerging for long-term investors, as I expect global stock markets to eventually recover from this setback. However, given that the coronavirus situation could potentially get worse before it gets better, a cautious approach to investing is warranted, in my view.
Is it a good time to buy stocks?
The first reason I believe that it could be a good time to invest is that valuations are now far lower than they have been in the recent past. In the space of just a month, equity indexes have fallen significantly.
The FTSE 100 index, for example, has dropped from around 7,500 points to just 5,350 points – a fall of nearly 30%. What this means is that many stocks are now trading at very attractive valuations, and offering much higher dividend yields.
If you’re a net buyer of stocks, as I am, that has to be a good thing. Think of it this way – would you rather pay full price for a product or receive a 30% discount?
Fear is in the air
Another reason I feel that it could be a good time to invest is that there is a high degree of fear in the air right now. Many investors are in panic mode – last week, the FTSE 100 had its worst day since 1987.
In the past, investing during periods like this has generally been extremely rewarding in the long run. Just ask Warren Buffett, who says that the key to making big money from stocks is to “be greedy when others are fearful.”
A cautious approach is sensible
Of course, it’s important to realise that stocks could get cheaper from here. If the coronavirus situation gets worse, which I think it probably will, stocks could continue to fall in the short term.
So my advice, if you’re considering investing in stocks now, is to average-in to the market over time. In other words, drip-feed money into the market slowly. That way, if stocks do fall further, you’ll be able to take advantage of the lower share prices on offer.
I also think it’s sensible to be selective about your investments. In my view, the best strategy is to focus on high-quality companies with strong balance sheets and avoid investing in sectors that are likely to be hit the hardest by the disruption (such as airlines).
In the long run, stocks are likely to recover. They have always recovered from economic shocks in the past. Those who are brave enough to invest now, while uncertainty is high, should be rewarded.
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Views expressed 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.