Stock market volatility has vastly increased in recent months. Factors such as high inflation, rising interest rates and geopolitical challenges in Europe have combined to cause share prices to gyrate significantly. Furthermore, the stock market has fallen by around 24% since the start of the year as investor sentiment has weakened.
Many investors could feel that now is, therefore, a risky time to invest. They may believe there is the potential for stock prices to exhibit further heightened volatility and move lower over the coming months. This could cause the value of their investments to decline. As a result, they may believe that avoiding this risk is worthwhile and they should wait for the stock market’s volatility to reduce and its prospects to improve before buying any shares.
A logical strategy
In my view, this is not the right strategy to use at the moment. Certainly, the stock market’s outlook is more negative now than it was at the start of the year and its price level could move lower in the short run. But buying shares now could prove to be a very logical move for several reasons.
If stock prices fall following a purchase, investors will only experience paper losses. Indeed, no loss in any stock is crystallized until it is sold. Investors who buy shares now can hold through further difficulties and enjoy a subsequent recovery that is very likely to take place based on the stock market’s track record.
In addition, it is impossible to find the bottom of any stock market decline. Investors are likely to either be too early or too late when seeking to buy at its lowest ebb. And given that share prices can quickly rise from their lowest point, investors waiting for an improvement in sentiment and the economic outlook may miss out on attractive valuations that are currently prevalent due to the presence of heightened uncertainty.
Defining risk
Indeed, buying shares now could be a less risky option than making purchases during more benign economic periods. A wide range of high-quality companies now appear to trade at a discount to their intrinsic values and, therefore, offer margins of safety that compensate investors for a relatively uncertain period. This could mean they offer a more favorable risk-reward opportunity for long-term investors.
The use of a steadfast value investing strategy that aims to capitalize on the stock market’s cyclicality may further reduce overall risk. As Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) chairman Warren Buffett (Trades, Portfolio) once said, “Risk comes from not knowing what you are doing.”
Value investors who are prepared to buy and hold for the long run could find there are rich pickings in today’s market. Buying opportunities may be more plentiful, not to mention more appealing, than they were a matter of months ago.
