Investing in stocks: price versus affordability
With the current stock market so high, this might not be a good time to invest on the face of it. However, as is the case with any investment, the price isn’t the only or even the best element to consider.
Financial analyst and True Wealth editor, Dr Steve Sjuggerud, points out that the price is less important than the value of an investment – where incomes and interest rates are a vital part of understanding if something is an affordable investment.
Ken Little has described the difference between a stock’s value and its price, and why traders focus on price while investors focus on value.
In Dr Sjuggerud’s chart of stock market affordability from 1980 to 2009 (below), the lower the reading, the more affordable the stock. At a glance, it’s obvious how overpriced stocks were at the 1987 peak and during the 2000 dot-com bubble, and in contrast, the value they represented at the bottom of the 2009 slump.
The market has had 10 years of recovery and growth from its 2009 low point. However, while prices may have risen, the growth over that period has not resulted in an overpriced market.
The following updated chart, extended to cover the last decade, indicates that stocks are still affordable, relative to the benchmarked interest rates, which have remained low throughout the period. For comparison, the US Treasury 10-year bonds only pay around 1.5% interest in September 2019, and inflation will continue to eat into their value.
Dr Sjuggerud notes that “the main competition for stocks right now [are] government bonds that are sure to lose money.”
So, while stock prices are high, they are a comparatively very affordable investment option. The trick remains, of course, in selecting your stock investments wisely.
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