Investing can be challenging at the best of times. Following March’s stock market crash, volatility is still elevated and there is now a second wave of the coronavirus. Right now is not the best of times. Concerns about a second market crash are bound to be intensifying. In times like these, some level-headed advice is needed. Famed investor Peter Lynch has plenty of this to offer, and two of his lessons appear particularly important now.
Stock market timing
Peter Lynch does not try to time the market. He believes that more money is lost predicting a downturn than in the downturn itself.
Nobody knows for sure when a stock market crash will happen. But, investors will sell stocks (or not buy them) when they fear one is on the way, only to see the markets keep rising. This behaviour can persist for some time and a lot of gains can be missed. Eventually, investors might start buying again only for the markets to crash months or even years later.
In the long term, markets go up, but there will be downturns along the way. Peter Lynch has cautioned that if investors need to cash out portfolios in six months, or even a year or two, they probably should not be invested in stocks. Being able to stick with an investment for 10, 15, even 25 years allows for the short-term effects of a crash to be overcome.
‘Time in the market beats trying to time the market’ is a succinct way to capture the essence of this first lesson from Peter Lynch. Personally, I invest monthly in a basket of stocks no matter if the markets are up or down. I have a long (more than 10 years) time horizon for my stock investments. If markets do crash, I get more shares for the same amount of money invested. And, in a decade, they should be worth a lot more.
Know the market
Peter Lynch thinks some people take more care when buying a fridge then they do when buying stocks. Appliances get compared on price, energy efficiency, size, and average customer reviews before buying. Sometimes, however, significant sums get invested in a stock on the back of a tip heard at a party. Buying shares of businesses that are not well understood is a recipe for disaster and more akin to gambling than investing.
Before buying a stock, even one tipped to be a raging success, Peter Lynch urges investors to ask themselves whether they understand the business. Some businesses are relatively straightforward to understand. Others, for example, a biotech startup, might need a technical background to get to grips with.
I stick to investing in businesses that I can understand. If a stock market crash occurs I am less likely to panic and sell my stocks if I know what I have bought. If the investment case for the next 10 years has not changed, then I stick to my regular investment plan and buy at a discount.
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James J. McCombie has no position in any of the shares 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.