The financial markets can seem complex at times. Ask for advice and some will recommend you buy shares at any time, some will say wait for a dip and others will be too cautious to suggest taking any action. So, who do you listen to?
We’re going to straighten things out by explaining the best course of action for investing. We’ll also take a look at whether now is a good time for you to get involved.
[top_pitch]
Is now a good time to buy shares?
Many markets across the world are hovering close to all-time highs. If you check out the price of a popular measure like the S&P 500 index, you will see it’s currently at top levels.
Sometimes this scares people. They think that if share prices are high, then they must come down. But this isn’t necessarily the case.
If you zoom out and look at the bigger picture, you’ll see that most markets tend to trend upwards. So although measurements might say we’re at a high point, history shows that at some stage in the future, we’re likely to hit higher highs.
This is why it’s often preached that time in the market is more important than trying to time the market.
Why do markets tend to grow?
It’s important to note that the past performance of the market does not dictate future results, and similar returns are not guaranteed when you buy shares. However, there are a number of key reasons why stock markets tend to expand rather than shrink:
- Population growth means that there is a larger workforce and more people contributing to economies
- Increasing wealth and standards of living provide more money to spend, which injects more cash into markets and businesses
- Lower instances of war and conflict allow us the luxury of planning ahead – doing things like buying homes and investing in pensions
- Health advancements give us the chance to live longer, which leads us to spend more money over a longer lifetime
- Technology advancements make things more efficient, which can lead to bigger profits
Not every country is fortunate enough to have these conditions. Often, places that don’t meet them tend to have poorly performing economies. But for countries that check all these boxes, like the UK and the US, there are few obstacles to stop the economy from growing over time.
Should I wait to buy shares?
The biggest thing to consider when it comes to investing is your timeframe. Right now might be a worse time to invest than yesterday. But then investing today could be much better than waiting until tomorrow.
We are hardwired as humans to care about the short term. But when it comes to investing, it’s the long-term outlook that matters. This can be unnatural to grasp because it sometimes feels alien to think so far ahead. This is why it’s more difficult than it sounds to act rationally and not emotionally when it comes to your investments.
[middle_pitch]
What if I buy shares and then the market drops?
There is no denying that this could happen. Imagine you bought shares back in February 2020, only to see their value plummet the month after when the coronavirus pandemic hit. But, if you’d been patient and simply held onto your shares without panicking, you would likely be in a better position now.
This is why it’s important to keep your cool when the stock market drops. It is inevitable that the market will lose value at times. Sometimes, there could be a quick recovery, like we saw last year, or it might take longer. This is why the usual recommendation is to only invest if you’re happy not to touch that money for at least a few years.
No one knows for sure what is going to happen, but it’s important you are able to leave your invested money alone. You don’t want to be in a position where you need to withdraw funds during a down period. It’s only when you cash out and sell shares that they become an actual loss.
How do I go about buying shares?
In the UK, you can buy shares very easily using a share dealing account. But it’s crucial to set yourself up with a decent platform that will give you access to the right markets and investments.
The other huge benefit we have here is the ability to use a stocks and shares ISA. This type of account will protect your growing investments from tax. Keep in mind, however, that tax rules can change and that tax treatment depends on your individual circumstances.
It’s also important to understand that even though markets tend to grow, it is still possible to make bad investments, and not every company will be a winner. So it’s vital you do your research and get some professional advice if you need it.
