Today’s investing advice from the pros.
Are you wondering whether now is a good time to buy stocks? Experts comment that there’s a disconnect between high stock market valuations and the struggling economy. Certain ratios such as price to earnings, price to book and price to sales are at high relative levels, says Robert Johnson, CEO of Economic Index Associates. By conventional measures, the stock market might be overvalued. But when considering low-yielding fixed investments, stocks might look more attractive. The following financial professionals provide their insights into the question of whether the stock market is overvalued today, if it’s a good time to buy stocks and how to go about doing it.
How stock pickers should choose stocks.
Stephen Taddie, managing partner at Stellar Capital Management, advises investors to consider investing in stocks after performing an evaluation. He suggests researching stocks by examining the price paid for a dollar of earnings and a dollar of dividends. The price-earnings ratio and other valuation measures are solid starting points when seeking suitable companies to buy. “Some companies trade at a discount to their peers for a reason, but others may have simply been overlooked,” Taddie says. Sometimes even the pros can improperly value assets. The stock market is richly valued today, but there are still good deals to be found. Over the long term, stocks are a sound way to profit from future inflation and the growing earnings of a well-run company.
Now is a great time to buy for the long term.
Investors should have a time horizon of at least five to 10 years. According to David Kass, finance professor at the University of Maryland, “The S&P 500 (including dividends) has achieved a positive return in 80% of the years from 1942 through 2019.” During the last 78 years, the stock market rewarded investors with more than a 9% average annual return. Interest rates are a strong determinant of stock prices. Currently, long- and short-term interest rates are at historical lows and are expected to remain so for the next several years. Since fixed assets, like short- and long-term bonds, offer negligible yields, stock market investments are an attractive alternative, Kass says. Just remember to maintain an asset allocation in line with your risk-tolerance level.
The stock market remains a path to significant wealth.
Another fan of investing in stocks now is Matt Fox, founder and CEO of Ithaca Wealth Management. Fox reminds investors that, “When you own stock, you own a piece of a business, not a piece of paper.” Although the country is currently in a difficult time due to the pandemic, many businesses are thriving. When the current crisis passes, sound U.S. and global businesses will remain. The power of compound interest — the concept of an initial investment exponentially growing based on growing capital gains — and reinvested dividend payments, known as DRIPs, enable small investments to massively increase over time. Additionally, current government stimulus policies and technological advances that support work-from-home solutions will add to the strength of businesses.
Invest now, up to your target.
Before investing, it’s common practice to set target percentages for stock, fixed income and other investment classes. For example, a moderate investor might allocate 60% of their portfolio to stock investments and 40% to fixed assets. This fidelity to a predetermined asset allocation helps investors weather the inevitable financial market declines as fixed-asset gains might offset stock market losses. Sam Fraundorf, chief investment officer at Diversified Trust, recommends that investors buy stocks up to their target allocation. This removes the temptation to time the market. Fraundorf cautions not to overweight stocks today, and he believes that the pros and cons of buying stocks are evenly weighted, with monetary policy on the plus side and unemployment and unknowns surrounding the health crisis on the minus side.
Data says to buy stocks.
Johnson highlights research from well-respected firm Ibbotson Associates, which reports that since 1926, large-cap stocks have had a positive return the vast majority of the time. “So if history is any guide, the stock investor is rewarded with a positive return approximately three out of four years,” Johnson says. Despite the long-term positive trend of stock market investing, it’s important to be aware that during down years, the returns can be abysmal. In 2008, the S&P 500 lost around 37% that year. Despite occasional devastating losing years, since 1926, over rolling five-year holding periods, large stocks like the majority of companies in the S&P 500, have yielded positive returns around 87% of the time. So long-term investors typically win when buying stocks.
Time in the market vs. timing the market.
Anthony Denier, CEO of Webull Financial, also reminds investors of the peril of waiting for the best time to invest. “Waiting for a good time to buy stocks means you’re missing out on potential returns in the meantime,” Denier says. Additionally, with the Federal Reserve buying corporate debt, it’s likely that, in general, businesses and the economy will profit. That said, Denier is realistic. He recommends that before investing, investors should consider their financial situation. Assess whether you’re in a position to handle a market decline without selling. That means, before buying stocks, pay off debt and build up emergency cash. Finally, if you’re wary of investing in an uncertain and highly valued market, then consider dollar-cost averaging, with which you regularly invest a set amount of money into the market, buying more shares when prices are lower and fewer shares as prices rise.
Buying stocks in a bear market is better.
It’s most profitable to buy stocks when prices and valuations are lower, such as during a bear market, says Brendan Erne, director of portfolio management at Personal Capital. Unfortunately, investor psychology typically drives investors to behave irrationally and buy near market peaks, only to sell at the bottom. “Out of fear, investors wait for an ‘all clear’ signal that never arrives,” Erne says. “And by the time they’re comfortable again, the market recovery is underway while investors have missed much of the upside.” That said, Erne believes now is a good time to invest, with a few caveats: Maintain your asset allocation and consider dollar-cost averaging. The consensus regarding whether now is a good time to buy stocks or not is yes. Remember that investing for the long term is key and timing the markets is futile. So determine a reasonable asset allocation and invest with a long time horizon in mind, not a quick profit.
What financial professionals have to say about the markets:
— How stock pickers should choose stocks.
— Now is a great time to buy for the long term.
— The stock market remains a path to significant wealth.
— Invest now, up to your target.
— Data says to buy stocks.
— Time in the market vs. timing the market.
— Buying stocks in a bear market is better.
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