With the market drop, is now a good time to invest?
If you are going to buy index funds, ETFs, or mutual funds the answer is no. 12 months ago the Dow was sitting at 20,269 and today it is at 24,640. Broadly speaking the market is still very high. You should not buy stocks when they are overvalued.
You can invest in individual stocks, but you have to be very selective. Only buy quality stocks when they are undervalued.
Here’s how you know if a stock is undervalued:
- It’s current dividend yield must be higher than it’s average dividend yield.
Here’s how you know if it’s a quality stock, follow my 12 Rules of Simply Investing:
1. Do you understand the product or service offered by the company?
2. Will people still be using this product or service in 20 years?
3. Does the company have a low-cost durable (lasting) competitive advantage?
4. Is the company recession proof?
5. Has the company had consistent earnings growth?
- Generally, the EPS growth must be at least 8%
6. Has the company had consistent dividend growth?
- Generally, the dividend growth must be at least 8%
7. Does the company have a low payout ratio?
- Payout ratio must be 75% or less.
8. Does the company have low debt?
- Debt must be 70% or less.
9. Does the company have a good credit rating?
- Company must have a minimum S&P Credit Rating of “BBB+”.
10. Does the company actively buy back its shares? (optional)
11. Is the stock undervalued?
a. The P/E Ratio must be 25 or below.
b. The current dividend yield must be higher than the average dividend yield.
c. The P/B Ratio should be 3 or less.
12. Keep emotion out of investing.
- A reminder to keep emotion out of the selection process. Discipline and patience are the keys to successful investing.
Learn to Invest
Learn how to invest, market drops are normal, the key is to remain calm, and follow the 12 Rules of Simply Investing. Don't wait to start investing.
Did you enjoy reading this article? If so, I encourage you to sign up for my newsletter and have these articles delivered via e-mail once a month…and it’s free!