Is Now A Good Time To Invest In Shares?
As of August 14th 2009 the FTSE 100 is trading in the 4700s and the Dow Jones is as high as 9400. The quiet summer months are drawing to a close and volatility is sure to go up as is normally the case in September and October. So with the economy showing signs of improvement, is it a good idea to start investing in the stock market again?
Well my own view is that despite the recent stock market rallies, it’s far too soon to start ploughing your money back into shares. The markets are fairly valued right now in my opinion and so there’s little value to be had in any of the major stock market listed companies.
In some respects the fact that the major indices such as the FTSE 100 and the Dow Jones are trading so high, indicates that any economic recovery that may be forthcoming in the future is already priced into the markets.
It’s hard to disagree with the fact that the economy will be a lot stronger at some point in the future, so as a result the the major indices will probably be trading much higher than they are at the present time. However if you are investing in shares for the long-term you really want to be buying stocks when they are undervalued.
This is determined by looking at things like PE ratios and the ratio of market capitalization to profits. You should try to invest in stocks that are undervalued according to present and historic data. Sadly the fact that the markets have risen sharply recently has lifted the price of most of the major listed companies.
Therefore your best bet is to either wait for the stock markets to fall back down again so various companies’ shares are a lot better value, or put your money into some of the smaller companies that are not so closely correlated to the movements of the wider stock market.
With regards to the first point, a market correction certainly cannot be ruled out because the markets have gone up far higher than many experts were predicting, and so a a sell-off of some description could well be imminent.
Small-cap stocks probably offer a little more value right now because there will always be some companies that are grossly undervalued. The only problem you face is that in tough trading conditions, like the ones we are experiencing at the moment, these fledgling businesses are very high risk investments because not very many of them come through a recession unscathed.
So overall my own view is that the best strategy is possibly to invest in strong companies that have a long record of earnings and dividend growth. However I don’t necessarily think now is a great time to invest because I think the markets will probably come back down once more before we start to see a meaningful market rally (this is only my opinion and does not represent financial advice).
It might be a better idea to focus on short-term trading instead. Whatever you do, it’s important that you keep up with all the latest online trading news and all the latest economic announcements in order to help you gain an understanding of where the markets may be headed in the foreseeable future.
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Tags: investing