It’s no understatement to say that the coronavirus has sent markets into free fall. It has come as something of a shock to the system for many investors after an extended bull market has seen stock prices rising steadily for years. In the case of the Dow Jones industrial average, for example, an 11 year run has been brought to an abrupt end with a brutal downturn.
For long term investors, by far the best course of action in the face of plummeting share values is none. There really is no better option than sitting tight and waiting for the markets to recover, which they inevitably will.
But what if you have cash ready to invest? Could this be the opportunity you are waiting for? After all, before the coronavirus, stocks were looking pricey and investors feared buying at the top of the market. Subsequent events have proved that those fears were well-founded but have they also provided a golden investment opportunity?
Share prices are significantly lower than they were pre-coronavirus with shares in some of some of the world’s most solid companies much reduced in price. Take a look at Apple’s chart for the last month:
Cash-rich investors with a lump sum to invest have a tricky decision to make: buy now or wait and see how low prices can fall.
Should you buy shares now or wait for prices to fall further?
It all comes back to that thorny issue of trying to time the markets. The upshot is that it is fiendishly difficult to do. While this is a good time to buy Apple shares compared to a month ago, what will the graph look like over the next month? If you were to wait before investing, would you get an even better deal? When will the share price bottom out?
The fact is that you cannot predict the exact moment when rock bottom will be hit. No-one can. In reality, stocks are likely to continue to fall but until when is anyone’s guess. History tells us that markets often rebound unpredictably and with a vengeance. If you delay the decision to buy you could pay heavily for missing the early stages of a market recovery which have often provided the largest percentage of returns per time invested following previous bear markets.
Volatile markets often lead to investor procrastination because as humans we are hard wired to follow the herd. It takes a brave individual to go against the herd and invest when everyone else is selling. It seems more logical, and is certainly an easier decision emotionally, to subscribe to the herd mentality and wait until after the markets recover to invest, but it won’t be the most profitable decision.
By buying shares now you will get your money working for you as quickly as possible. You will need to brace yourself for further falls. They may happen, in fact in all likelihood it will. That could make you feel in the short term like you have made a terrible decision but if you are investing for the long term, keep your mind on the distant horizon. Over time, the markets will go back up and hindsight will tell you that you bought at a good time.
Remember: by investing now you may not catch the very bottom of the market but your returns will still be a lot better than if you had bought before share prices plunged.
Of course, it’s important to make any investment decisions within the context of an overall financial plan which takes into account your personal risk tolerance and your investment time frame. That’s why I would always advise taking advice from a professional before investing large lump sums.
If you are unsure whether now is a good time for you to invest, why not book an appointment with me on lcalver@infinitysolutions.com to work out your investment priorities and plot the right course for you going forward?
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