Important – Please Read
This post has become very popular during 2013, even more so since the Dow Jones hit new peaks and closing at new highs in March 2013. The information is more important than ever.
You shouldn’t get carried away with the new found found enthusiasm for the stock market, just as you shouldn’t become disillusioned when it falls. A couple of key points to always remember with the stock market:
- The Market tends to rise by the staircase and fall with the elevator – Good gains can be wiped out very quickly
- For you to be 100% sure that now is the right time to buy, you need someone else just as convinced that now is the right time to sell. That’s how the market works, you need buyers and sellers
The rest of the post has not been changed other than minor changes to the numbers that occurred in Jan 2013.
Cheers and please read on.
This Post has been updated to reflect market conditions to January 3, 2013
Question – The world’s stock markets do appear more stable when compared to the last few years, so is this a time to get into the stockmarket?
Answer – It doesn’t matter if now is the right time, it depends if you have the right investment time frame and the right investment risk profile to invest in the stock market.
As we have witnessed over recent years, the stock market can be very volatile. It can fall in value and wipe out many years gains in a short space of time.
The markets right now may look cheap, a bargain you might say. Below is a brief chart of three major stock market indices highlighting their peaks (highest valuation achieved) and their current valuations. The ‘Growth to Peak’ highlights the growth required from their current valuations to reach their previous peak.
|Peak*||Now**||Growth to Peak|
|Dow Jones (US)||1,4198||13,391||6.03%|
|ASX 200 (Aus)||6,829||4,740||44.07%|
|FTSE 100 (UK)||6,731||6,047||11.31%|
*Peak dates: DOW - 09/10/2007, ASX - 01/11/2007, FTSE - 12/10/2007
** Current (Now) dates: January 3, 2013
If you take the view that stock markets always regain their losses and post new highs (history suggests this always happens), the stock markets do look attractive
The Australian Market will need to gain 44.07% to reach it’s previous peak. However, there are no guarantees that this will happen. For example, Japan’s stock market is still well off its peak that occurred in 1989!
The chart also highlights how tricky it is to make the right investment. By comparison, the Australian stock market is easily the furthest from its peak. Yet Australia, unlike most of the western world, did not suffer a recession during the global financial crisis and the economy continues to look very strong compared to the US and UK.
Back to the critical questions for you
Your investment time frame – If you need your funds for a short to medium term goal, such as buying a new house, the stock market can be very risky. Ideally, your time frame should be in excess of five years.
Your investment risk profile – There are two key elements to your investment risk profile
- Your personality – ‘Can you sleep at night when stock markets are falling?’
- Can you afford the losses?
As we saw in the global financial crisis, most people understood the basic premise of the investment risk associated with the stock market, i.e. Knowing that losses will occur. However, as the losses accumulated many investors couldn’t sleep at night and decided to sell, often at the wrong time.
We have also witnessed investors who were not financially prepared for a major downturn in the stock market. The most affected investors were those had borrowed funds for their investments (often referred to as margin loans). Many investors had to sell their shares at the worst possible time to repay the loans upon receiving a margin call from the bank.
If you have the time and you can afford to suffer losses, then the stock market could be a good option right now. Just be prepared for a rocky road. And never forget:
For you to buy a stock, you need a seller who believes it is a good time to sell!
Important – general advice only. You should always seek professional personal advice before investing.