The stock market has had a tough start to the year 2016. In January the S&P500 closed down almost 6% at month end, while the MSCI World Stock Index closed around 9% lower in the first month of the year. This horrendous start to the year for stocks was caused by a fear of an economic slow down in China, sluggish global economic growth, a steep drop in oil prices and uncertainty of the timing of future interest rate hikes by the Federal Reserve.
However, the stock market has managed to recover since January, as commodities (including oil) are looking like they are bottoming out, and overall market sentiment has improved again. The S&P500 is now only down 3% year-to-date and WTI crude oil has recovered back to over $36 from below $30. This correction in global stock markets could prove to be a good buying opportunity for those looking to enter the stock market.
Why Now Might Be A Good Time To Invest In Stocks
If you have already set up an online brokerage account, and you know the basics of how to buy shares, then now might be the right time to build an investment portfolio, if you haven’t started to already. Here is why:
- Firstly, as an investor you are really only interested in stable long-term annualized returns for your portfolio. In other words, short-term volatility shouldn’t scare you. Nor should you let the media’s doom and gloom stories spook you into not investing. The focus, when constructing your portfolio, should be a high annual average expected return on your investment, which by investing in stocks you can achieve, given stocks are historically one of the best performing asset classes.
- Secondly, the sooner you start investing, the sooner you can benefit from the power of compound interest. If you set up your investment account so that you automatically re-invest dividends and/or set up automatic stock purchases every month, to increase your portfolio holdings, then you can benefit greatly from the power of compounding returns. While the longer you wait to invest, the less you will benefit from compounding returns.
- Thirdly, this market correction provides a great opportunity to pick up stocks ‘on the cheap’. Many stocks have lost substantial value since the start of the year, but that includes stocks in some excellent companies with great long-term prospects. Hence, now would be a good time to invest in strong companies at a cheaper price.
- Fourthly, dividend yields have gone up across the board making the high-yield dividend stocks even more of an attractive investment. A stock’s dividend yield refers to the percentage of your investment in the stock that you will be paid as a dividend per year. The dividend yield of a stock is calculated by dividing the annual dividend per share by the price per share. Hence, with stock prices having come off, the dividend yields have gone up making dividend stocks more lucrative for investors. Furthermore, high-yielding dividend stocks tend to come from stable, defensive industries such as utilities. Hence, they tend to be a less risky holding in your portfolio.
While it is generally recommended to hold a diversified portfolio of stocks, bonds and alternative assets, stocks are historically one of the best performing asset classes. With stocks having cheapened, and market sentiment having turned positive again, it looks like right now could be the ideal time to enter the market and start buying stocks.