Is It Too Late To Buy Shares?
Since March our market has risen by 24%, posing a dilemma for people looking to buy
. Should they buy now in the hope that the rally will continue, or are they better to wait, on the basis that the market has run too hard and a pull back in prices is inevitable?
Since 2004 our market has given investors a rollercoaster ride. From 2004 to 2007 it rose 50% on the back of the global economic boom. Then, from October 2007 to March 2009, as the recession and global financial crisis started to bite, it fell by an unnerving 40%. But it has staged a remarkable 24% recovery since March.
Before we get too excited, we should acknowledge that even though it has bounced beautifully over recent months, the market is still 27% below its 2007 peak. It needs to gain a further 38% to regain this 2007 high point.
Therein lies a very important lesson for investors of shares. Notice that the 40% decline requires a recovery of over 60% to get the market back to square. Such is the brutality of maths - losses require gains of a much higher magnitude to get back to the starting line.
It is worth bearing this mathematical reality in mind as we ponder whether to buy now or not. Many people are regretting missing out on this latest rally. But the truth is that today, even after a 24% rally, people who reduced their share exposures in 2007 but also missed buying in March, are still well ahead of those who suffered the 2008 losses but stayed in the market and benefited from the recent bounce.
A conservative approach, it would seem, is still the best way to approach the market. It is far more important to be right about avoiding losses than it is to be right about picking rallies.
Frankly, I do not nor, I would humbly suggest, does any other human being, have any idea whether it will continue upwards or not from here. Markets are utterly unpredictable.
But after such a strong spike in the market, it would seem prudent to take a cautious tack. The golden rule that is better to buy when markets are low than when they are high, still applies.
I see a number of experienced investors at present, that are wary of the risk of a decline in price, but also recognise that the market could continue northwards, who are approaching the market by investing in instalments.
I believe this is a very wise approach. It takes timing right out of the equation. These people are splitting their investment capital into smaller chunks and then drip feeding this into the market. They are also choosing to buy the companies on their buy list that look the cheapest.
This is a very sensible way of mitigating the risk of buying just before a fall, while also gradually allocating capital to the market in case it continues to rise.
It is also important to take a long-term view on investing. People who are buying shares with a five or ten-year view can accumulate in relative confidence that prices should, over this time frame, appreciate.
Even better, investors who are buying shares in companies that provide solid dividends can invest with even more confidence. As long as the companies they buy can maintain or grow their dividends, receiving a regular income stream from your shares makes the ups and downs of share prices more tolerable.
Rather than spending too much time in trying to guess whether the market is going up or down, it is perhaps better to identify a range of high quality companies that pay solid dividends and then apply a measured approach to your investing. Gradually accumulate shares in those companies over time.
by: Cam Watson
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