Why I am still buying stocks

Since the beginning of 2020 the financial markets have taken a battering. All across the world economies have felt the effects of government measures taken to combat Covid-19. Bars, restaurants and gyms have all been closed; we have all been told by the government to stay inside, protect the NHS, save lives. A lockdown has been in place for weeks and only essential work should be taking place. All these measures have seen the steepest stock market crash in living memory.

From the start of 2020 to now (6th April) the FTSE 100 has fallen 26% and the S&P 500 is down 23%. Naturally this has caused a lot of panic and there is still a lot of uncertainty surrounding future economic performance, meaning that markets could still fall further. While the causes and consequences of the crisis are tragic and heartbreaking, from an financial stand point however, this crisis is probably the best time to invest.

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If you like Apple at $324 you should like it at $224

In the UK when is typically the best time to shop for big purchases? If you said Black Friday or the January sales then you are on the right track. The same logic is true with stock markets. Everyone knows the saying, “buy low and sell high”, while typically I would not endorse this philosophy as it encourages people to try to time the market – a very bad strategy – it does hold true for crashes. The best time to invest is during a downturn when company shares are ‘on sale’.

I for instance own shares of Lloyds Bank (LLOY), before the crash shares of Lloyds were trading at around 55p per share; they are currently trading at 29p per share. Lloyds have a strong balance sheet and published a pre tax profit of £2.5 billion in 2019, and that is including having to contend with PPI claims too. Banks in general have entered this crisis in a far stronger position than that of 2008, especially when you consider the causes. Therefore, why would I not continue to buy shares of Lloyds.

In a nut shell, you should still be happy to invest in companies despite their share prices being down. This is of cause having first researched the company.

Steep fall, steep recovery?

There are generally three types of recession – V, U and L. A V-type recession means that there is a sharp fall followed by a sharp recovery. A U-type recession infers a more gradual decent into a recession with a equally gradual recovery, typically over a number of years. Finally, A L-type recession implies a recession event followed by a slow recovery much longer than the recession. It is hoped that the current crisis is a V-type due to the record breaking falls that we have seen.

The FTSE 100 during the 2007/8 crash hit its peek in June 2007 but did not reach its lowest point until February 2009. That is 20 months of recession falling 40%. The pace of fall during this crisis has been much faster with 36% fall within a space of 4 months. The following 20 months from February 2009 the FTSE 100 increased by 36%. Therefore, had you invested when the market was at its lowest a £1,000 investment would be worth £1360 within 20 months. Had you done regular contributions of £50 in addition to the £1,000 investment during that period it would have been worth £2,641, a profit of £641.

Warren Buffet said, “Be fearful when others are greedy and greedy when others are fearful.” While I wouldn’t want to come across as greedy, it is excellent advice. When the market is posting all time highs, I am going to be hesitant to invest large amounts. But when prices are ‘on sale’ at 30-40% and you think companies will still have a solid future, of cause I will put money into them.

Slow and steady wins the race!

While most of this article will come across as ‘buy low, sell high’, that is not my investment strategy. I am a long term investor which means when I buy into a company I intend to hold that investment for years. Additionally, I would not recommend investing in lump sums, rather invest consistently over time. With stock markets time is your best friend and compound interest your weapon, for every crash there is a recovery that follows; and with every recovery there are new all time highs. This is how the markets work.

If you invest consistently over a long period of time you will see returns on your investment to be proud of. Between the start of the year 2000 and before the current crisis the FTSE 100 had an overall growth of 14%, that includes the dot com bubble and 2007/8 crash. The S&P 500 over the same time period posted a whopping 131% increase. So the lesson to take here is be patient, think long term and invest consistently over time.

None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.

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