Is a booming stock market a good time to start buying shares?
Back in 1984, the FTSE 100 index of leading shares was launched, at a level of 1,000. This week, the stock market bellwether achieved a new record and reached 8,000 for the first time in history.
A lot of investors follow an approach of buying low and selling high. So if I had never invested before, would it make sense for me to start buying shares in a booming market?
What a stock market high means
The FTSE 100 reaching a new high means that the 100 shares contained in the index have, in aggregate, reached a high price. However, things are actually a bit more complicated than that summary may suggest.
The index is a bit like a sports league – on a regular basis, some companies are demoted to the FTSE 250 index, while other firms make the step up to the big league. That is based on market capitalisation.
In that sense, arguably there is a predisposition to a rising index over time. Companies that perform poorly and see their share prices fall drop out of the index. Shares that have already been performing strongly replace them.
There is also a survivorship bias. Today’s level reflects the performance of the companies currently contained within the FTSE 100. But along the way since its inception in 1984, dozens of companies have fallen out of the index or stopped existing altogether.
So saying that the FTSE 100 is at 8,000 today does not necessarily mean that buying the shares that were in it back in 1984 and holding them until now would have led to an eightfold return.
Are we in a boom?
On top of that, while the FTSE100 has hit new highs, it is only 6% higher than a year ago. That is a welcome gain, but it is not an outlandish one.
It is the flagship index, but it only represents one part of the market. Over the same timeframe, the FTSE 250 index of smaller and medium shares has shed 7% of its value.
So it is not accurate to say that, overall, the stock market is booming. But even if it was, I would likely still be buying. Share prices may have gone up. But if earnings potential has increased even more, I think shares could actually offer better value than before.
As I am not buying the index but individual shares, what matters to me is the valuation of specific shares. Whether in a period of stock market volatility or records being broken, there can still be bargains.
When to start investing
In fact, that is why I think any time could be a good one to buy shares for the first time.
I have been buying shares lately despite the key stock market index moving higher. Indeed, this week I bought more shares in pub chain J D Wetherspoon. The FTSE 250 company has seen its shares fall 42% in the past year.
Either as a new investor or an experienced one, I do not think the key factor in determining results is when to buy in terms of how the broader market is performing. It is what to buy and at what price.
The post Is a booming stock market a good time to start buying shares? appeared first on The Motley Fool UK.
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C Ruane has positions in J D Wetherspoon Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.