?Yes? says the theory of contrarianism. But the answer is ?no? accordingly to modern finance theory. In this article I will provide a brief analysis of these two arguments for and against investing in shares during a ?recession? or ?period of austerity?.
Yes: Contrarianism.
During difficult economic times, the stock market tends to be depressed at 5-10 year lows. Investors which invested before the fall are licking their wounds, and the financial media is reporting a bleak outlook on a daily basis. Choosing this moment to put your hard-earned money into stocks & shares might seem like madness given the almost unanimous pessimism, but according to contrarians it?s actually a great time to invest.
Contrarians believe that the market always tends to exaggerate current economic conditions, and this produces unjustifiable bull markets and unnecessary crashes caused by fear and investors behaving like sheep. In other words, they believe that when the market is ?100% convinced? that shares should be either at recent historical lows or highs ? the smart investor should be taking the opposite position.
It?s easy to see why this theory is popular amongst armchair investors. Take a look at a graph of the FTSE 100, and find which was the perfect time to invest in the last 10 years (the lowest point), and which was the perfect time to sell (the highest point). The best buying date was in 2003, when the general public feared an oncoming recession. The ideal selling date was at the end of 2007, when financial troubles were out of the picture, and the outlook for the global economy, led by emerging markets was fantastic. Simply put, this demonstrates that investing when news is good and selling when news is bad puts you in with the sheep, and completely on the wrong side of the market.
No: Modern Finance Theory
Modern finance theory suggests that markets are at least ?semi-form efficient?, which means that current market prices fully reflect all available knowledge and expectations of the future. Due to the ?wisdom of crowds? concept, it is believed that you cannot expect to beat the market in the long run, and that any time is a good time to invest in the stock market.
This finance theory leans towards the technique of investing your income as you receive it, across a diversified range of assets ? regardless of ?market conditions? such as a recession.
Modern finance theory places uses a few unrealistic assumptions (such as the rationality of investors) in coming to this conclusion, which has gained it many critics, including the whole managed fund industry ? which earns its fees from selling itself as being able to consistently outperform.
Conclusion
In my opinion you should take heed of both schools of thought. Listen to the contrarians and never be afraid to snap up ?cheap? shares when markets crash and make headlines, but also spread your risks as suggested by modern portfolio theory ? by investing in at least 20 shares to bring volatility down to acceptable levels.
Read more about how to invest in shares at Financial Expert.
Source: http://www.personalfinance4all.com/is-investing-in-shares-in-hard-times-a-good-idea/
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