On 27th March 2020, after a withering bear market kicked into gear only a month ago, it is now time to start buying shares and topping up on pensions, ISAs and stocks and shares accounts.
This is not an attempt to call the ‘bottom of the market’, in fact we could see further weakness from here especially if Italy’s and Spain’s Covid-19 crisis doesn’t continue to slow down and show that lockdown actually works.
The reality is that shares are now fairly valued. World-class businesses are trading at deep discounts despite having fundamentally sound business models that will remain intact and indeed recover once Europe comes out of the Covid-19 health crisis, hopefully by the summer.
Share Valuations in March 2020
As we referenced in our last post about financial crises in history, this has been a brutal and unprecedented elevator-shaft drop in asset values within a 4 week period. The time to buy is when there is blood in the streets, and believe me this does compare with other market panics (1929, 1974, 1987, 2000, 2008).
Instead of recoiling at the losses, in order to be successful, you need to train yourself to do the opposite. Be happy and joyful when world-class companies go on a fire sale! This is clearly the case today, with businesses like Unilever which we tipped back in January trading below the take-over offer it received from Buffett’s Berkshire Hathaway.
The FTSE All-Share index has fallen 26.2% from the peak it reached on 20th February 2020. We are down 3.71% today alone:
However, there is cause for hope. The FTSE All Share now has a dividend yield of 4.8% and that is the 5th highest market in the world. Is that guaranteed? No. But dividend yields are strongly correlated with the future 10-year returns for stocks. In other words, it suggests that in the future the returns on British stocks and assets will be superior as investors move back into the market and drive down yields.
One of the best ways to get access to the British share market is through the Vanguard FTSE All-Share Index. The fund is gold rated by independent fund rating site Morningstar, it has one of the cheapest fees in the industry at 0.06%, and it has a dividend yield of 4.8%. Even if that temporarily drops to 3.5-4% when all of the dividend cuts are brought in this year (as a result of Covid-19) it will surely bounce back in 2021-2022 when businesses are fully back to work.
Percentages are confusing
It took me a long time to realise that percentages are misleading. What does it mean when the FTSE All-Share has fallen 26.2%? If you buy the index today, then when it returns to the levels it was on 20th February 2020, have you made a profit of 26.2%?
The answer is: no! Of course not.
That’s a common mis-conception when it comes to percentages.
If the FTSE All Share index is 3,057p today, then if it rises 26.5% you only get 3867. Yes, it fell 26.5% – however it needs to climb more than that to reach the same peak. Why? Let’s do the math.
FTSE All Share Feb 20th: 4150
FTSE All Share Mar 27th: 3057
The answer is this: [(3057 – 4150) / 3057] = 35.75% rise to return to 4150
The FTSE All Share will rise 35.75% from today’s levels when it eventually goes back to the peak it reached on 20th February 2020. Suddenly, that sounds like a pretty enticing future return?
If we recover from Covid-19 and by late 2021 the economy returns to normal, you’ll see the FTSE All Share return to that level. In addition to that if you collect a 5% dividend you will end up with a 40% return within 18 months to 2 years.
Market Timing Model
We will continue to publish updates on the Market Timing Model. In advance of those publications those, please keep in mind that a number of measures have turned green and indicate a Weak Buy.
The market has reached at least a temporary bottom. There is no doubt that it may continue to fall over the coming weeks and months. That being said let’s hope we don’t see the 8-10% daily declines that we experienced over the previous four weeks.
Now is the time to consider taking the foot off the gas and wading into risk assets again, particularly in European assets where major economies are starting to see a peak in cases (Italy, Spain in particular) while Germany is managing the crisis fairly well so-far.
Frugalist Investor Conclusions
I intend to draw up a list of individual share buy tips over the coming weeks.
For inspiration, take a look at some of the best investment funds and see what institutional investors are buying. The Lindsell Train Equity fund is worth a look.
Follow our Global Dividend Aristocrat series here.
When you find yourself in a historic market sell-off, with the indexes severely red, during a public health crisis and the fear around you is palpable; well, if that isn’t indicative of a time to buy stocks and shares then I don’t know what is! Before I could click ‘publish’ on this article the Prime Minister Boris Johnson has contracted coronavirus and has moved into isolation. Let’s hope for his swift recovery, so that people can start to see that we are going to come out the other side.
Take care of yourselves and your families and keep the faith.
About the Author: David began Frugal Investors in order to help others learn about smarter money management – today. He has spent nine years working as a senior process improvement professional and has extensive experience helping FTSE 100 and Fortune 500 businesses to improve their efficiency, quality and speed of delivery.
Over that same timeframe he has built up a £1mn+ portfolio of stocks and bonds through self-directed investment. Follow David as he uses thorough, detailed investment research aimed towards accruing £2,000,000 in investable assets within the next ten years.