In what is one of the great ironies of stock investing, hordes of investors are selling their stocks and delaying buying more.
As stocks become cheaper and better value, people buy less. What gives?
There is no other product or service that I can think of where if things get cheaper people bail.
Why do investors sell stocks when they get cheaper?
One of two things is going wrong here:
1/. Investors are not invested according to their spending needs or are not diversified
All this means is that some investors have money in stocks that was supposed to be for the short term or don’t hold a wide enough range of assets and are now panicking because their planning was all wrong.
And/or
2/. Investors are panicking
If you are well diversified, have an investment plan and it is suitable for your spending needs (near and long term), then you don’t have much reason to panic. Long term, companies will continue to add value. Left alone, your unrealised losses will recover. But if you need the money soon or aren’t well diversified, then your lack of planning leaves you every reason to panic.
Stocks in the S & P (U.S) 500 currently have a price to earnings (P/E) ratio of around 18. Earlier in the year they were 23.
Basically, this means that companies are trading at 18 times earnings.
P/E ratio is calculated as stock price per share divided by company earnings by share.
This value goes up or down based on people’s expectations of company growth. When there is a lot of exuberance in the market, then stock prices go up faster than company earnings, leading to a higher P/E ratio.
Lower P/E ratios tend to mean confidence of company growth is lower.
But with cheaper stock values, comes better future potential returns.
This is because at a lower P/E ratio (stock valuation), you are able to buy more shares for your money.
Lets say a stock is valued at a P/E ratio of 30. For every $30 you are able to buy one share. Whereas, a P/E of 18 you are able to buy that same share for just $18.
Extrapolate this out to $5,000 to invest and you can buy 166 shares at P/E 30 and 277 shares at P/E 18.
A significant amount extra of shares you now hold just because shares are cheaper relative to where they were.
Now as earnings increase in the future, and market conditions improve, you will reap the reward of holding all those extra shares you wouldn’t have had if the market never experienced a downturn.
I understand why confidence is so low. With media covering every drop in the market and talks of recessions and bear markets, it’s hard to stay positive.
I recommend you shore up your investment plan and turn off your notifications, then you can ignore the noise and get on with life. This is where future money is made.
I find it strange that investor confidence is so low, when it should be higher than it was. Lower prices mean higher expected future returns. That is why my confidence is up. Whereas, when prices are so high, my confidence wanes.
I think most think too short term, when we should be thinking long term when investing.
But I do have a good investment plan, am well diversified and are invested for the long term. As are all the clients I advise.
Now is not the time to jump ship. It’s time to take the wheel.
If you need an investment plan or recommendations , then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here