The stock market crash: should you invest now?

The bottom of a stock market crash is the best time to invest, writes Thomas Carr.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As the stock market crash continues, it’s a sobering reminder that stock markets are basically just measures of investor sentiment. They reflect the future expectations of investors. That is, their expectations of economic performance and more specifically of individual businesses.

Share prices rise when investor sentiment improves and fall when it deteriorates. When share prices swing abruptly, it’s an indicator that sentiment has changed very sharply. Likewise, when share prices are only moving one way (as in a stock market crash), it shows that sentiment is firm and that investors have strong convictions.

Clearly, investor sentiment is currently very poor. In fact, it’s about as bad as I’ve ever seen it. It certainly seems a lot worse than it was during the depths of the financial crisis. Even more worrying is the fact that we don’t know how much worse things are going to get.

Bulls and bears

Investor sentiment alternates between being bullish and bearish, mostly operating between the two. Sir John Templeton – one of the most successful investors – famously said that ‘’bull markets are born on pessimism, grow on scepticism, and die on euphoria’’.

It follows, that it’s better to invest in periods when sentiment is poor, than it is in more bullish times from a long-term performance point of view. This is mainly due to valuations.

Worsening expectations result in lower share prices and lower valuations (how much investors have to pay to own a share of a company’s profits). This is significant because valuation is the biggest indicator of future long-term performance.

From this, we can also understand that the very best time to buy is when sentiment is at its very worst. In fact, the best time to buy is when the prevailing opinion is that things can’t get any worse, that economies and businesses are set to be destroyed.

Where is the bottom?

When sentiment is at its worst, the only way for stock prices is up. This point represents the bottom of a stock market crash. After this point, either future expectations improve, or valuations become attractive, bringing investors back into the market.

Of course, it’s impossible to time the market perfectly and buy at the very bottom of a stock market crash. What’s more, at times like these, it also seems impossible to predict which way sentiment is going to move next.

But what we can do, is acknowledge that stock markets are unusually cheap, and that sentiment is atrocious. From this we can then determine that any return to anything approaching normality will likely lead to positive investment returns. This is especially the case when competing investments, such as bonds and savings, offer such poor rates of return.

However, given that both stock markets and expectations are on a sharp downward trajectory, there’s clearly a degree of risk in investing now. This is why, instead of investing one lump sum right now, I plan to slowly drip-feed it into the market, over a period of weeks or even months. This approach might not offer the best returns, but it will surely help me to sleep better at night.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »