The stock market rally poses a tricky dilemma for investors. Should I buy shares as the market recovers or wait for another downturn?
This question is particularly vexing if you are a short-term investor. There’s greater pressure to buy shares very low and you need to time your buys much more accurately. For long-term investors (like all of us at The Motley Fool), the issue is less important. With a longer timeframe to work with, the odds that the market will go up and make your holdings profitable increase massively.
Of course, it’s always a more enjoyable, and profitable, journey if you can buy shares at a lower price. But a long-term investor can afford to take a bit less risk and wait for greater certainty. This also helps reduce risk of mis-timing the market.
The stock market rally
Many commentators have been surprised by the stock market rally. Perhaps that’s not surprising given the lockdown in the UK, Europe and in some other parts of the world, the loss of jobs in the US and more generally, the expected economic effects of Covid-19.
March was the low point or the point of maximum fear when share prices were really sharply down. The FTSE 100 is still well down on where it started the year, but the rise since March has been spectacular. This could continue or it could be a sucker’s rally, the latter being a rise before another fall. Given that no one can predict the future I’d urge sensible caution.
Should I buy FTSE 100 shares?
It is possible though to buy shares and be cautious. By keeping cash in a Stocks and Shares ISA and in your current account, you can hedge against nay future market fall while benefiting from the current market rally.
The least risky way to buy shares in the current uncertain market is, in my opinion, to buy FTSE 100 shares. Although ‘elephants don’t gallop’, they’re also less likely to go bust. That said, I’d see airlines and hospitality shares as risky, but generally speaking, there are many good shares on the FTSE 100 that can combine income and growth potential.
A number of FTSE 100 shares like Tesco are defensive. Tragic though the outbreak has been, some are even benefiting commercially from Covid-19 in a way that, for example, EasyJet or Intercontinental Hotels aren’t.
So far the market rally has been remarkable. It’s not too late though to buy FTSE 100 shares. Although I’d cautiously do so, especially as a long-term investor. I’d look for companies that are still paying a dividend and have a much lower P/E than at the start of the year. This will show they’re now much better value.
Even if there’s another downturn and this market turns out to be the calm before another storm, many FTSE 100 defensive shares ought to retain much of their value. More pertinently, in the coming years, share prices in good, profitable compnaies should be far higher than they are now.
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Andy Ross owns no share mentioned. The Motley Fool UK has recommended InterContinental Hotels Group and Tesco. 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.