Stocks Are Up – Is it a Good Time to Buy?
Which way should you turn?
US stocks are near a four-year high.
Australian stocks have jumped nearly 10% in just three months.
And gold is climbing back towards the magic USD$1,700 level again.
So, what should you do? Isn’t it a good thing when stock prices go up?
Isn’t that a sign that things are on the mend?
Maybe, but as any seasoned investor will tell you, it’s more important to know where prices are going than where they’ve been.
What you really need to know is whether financial assets represent good value at this price, and if so, how much further they could rise.
We’ll give you one view on what you should do below…
When it comes to stock investing, individual opinions don’t matter. That may shock you after everything we’ve written this week about the power of individualism.
But stick with us and we’ll explain.
The beauty of free markets is that the individual thoughts, actions, and expectations of investors come together to create a fair market price.
There’s no coercion. It’s a voluntary transaction. If you don’t like the price offered, you’re under no obligation to take it or pay it.
That pricing action is the same regardless of whether you’re buying an investment, a chocolate bar, or a new car.
(One Money Morning reader wrote in to say he used to have simple instructions for his staff: ‘Give the customers what they want. Smile. And take their money.’ That’s how business works.)
Of course, when you’re buying investments you don’t consume them. You buy them because you think the investment will be worth more in the future than today.
Right now, investors have driven US stocks to a four-year high, Aussie stocks to a 10% gain in three months, and gold towards USD$1,700.
It would be a fair comment to say that if stocks are going up, then it must mean companies are making profits. And if that’s the case, then maybe companies will make bigger profits next year…warranting even higher stock prices.
But what does this all mean for stock prices? As we mentioned at the top of this letter, US stock prices are high, and Australian stock prices have rallied strongly in recent weeks.
So is it time to fill up your portfolio with stocks?
In recent weeks we’ve suggested boosting your exposure to the market. Not by much, but enough so you’d benefit from a stock rally.
We even published a list of five beaten-down blue-chip stocks you should consider adding to your portfolio: Harvey Norman [ASX: HVN], JB Hi-Fi [ASX: JBH], Myer Holdings [ASX: MYR], Qantas [ASX: QAN], and Toll Holdings [ASX: TOL].
The price for each is higher than when we recommended them a few weeks back. But if you’re after a bunch of stocks to make up no more than 10-20% of your portfolio, we still reckon these stocks are worth looking at.
But be warned, just because stocks have risen, doesn’t mean they’ll keep going up. The high gold price is a warning sign to investors about the instability and risk in the global economy.
Our old chum, Sound Money.Sound Investments editor, Greg Canavan reminded his subscribers of this risk in his latest monthly issue.
‘During this long bear market (5 years and counting) momentary sharp rallies have lured many back into the market. That’s because rising prices anesthetise people’s brains to real analysis. The overwhelming complexity of the financial world means the vast majority of investors are content to let the price mechanism do the work for them. That is, a rising price means things must be getting better. Therefore, it must be a good time to ‘get back in’.’
Greg said investors need to be wary about the market repeating the pattern of the past five years…rallies followed by falls.
As much as we like to see the market go up, we don’t believe the problems facing the global economy have ended.
So how do you know if the market is good value? And how do you know which markets are good value?
Fortunately, Greg has a simple strategy that investors can use to find value during a bear market. He’s explained this strategy to his readers in this month’s issue of his newsletter.
And the first part of it doesn’t so much involve looking at stocks as looking at the value of currencies first. Because according to Greg,‘currency movements play a major role in long term portfolio performance.’ You can find out more about Greg’s analysis and how he’s using currencies to find value by clicking here…
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.