Should you invest when stock prices are high?

higher_stock_prices

Note: This post was originally written in February 2020, when the Dow reached a new high of over 29,000 points.

Should you invest when stock prices are high? The stock market continues to break new records and recently surpassed 29,500 points. As an investor, should you invest in stocks that are over-priced? The short answer is no.

Avoid buying overvalued stocks

When the stock market is high, generally stock prices are also high. High prices might be good for selling and taking a profit, but bad for buying. You, the investor should focus on buying quality stocks when they are priced low (undervalued).

Avoid the temptation of rising stock prices, or hot stock stories in the news, if a stock is priced high (overvalued) you need to avoid it. Have a look at two stocks below and see the difference in returns in just a few years:

  • The J. M. Smucker Company (SJM), was overvalued in April 2016
  • Caterpillar Inc. (CAT), was undervalued in April 2016

Company

Price in April 2016

Price in Feb 2020

Return

SJM

$132.52

$110.66

-16.50%

CAT

$76.79

$136.86

78.22%

You can see that an investment in CAT would have been the better choice. SJM declined in value during the same period. There is very little potential for an overvalued stock to go up in value because it is already priced too high.

How do you know when to buy?

Remember a stock is undervalued when it’s current dividend yield is higher than its average dividend yield. You can find both the current yield and the average yield for each of the 233 stocks tracked each month in the Simply Investing Report. In addition to looking for undervalued stocks you also need to focus on buying quality stocks. Quality stocks are those that pass the 12 Rules of Simply Investing.

Your focus as always should be on acquiring quality dividend paying stocks when they are undervalued.

“Price is what you pay; value is what you get.” - Benjamin Graham

My 12 Rules of Simply Investing provide you with a step-by-step guide on what to avoid and what to invest in for the long-term. Start building your own profitable stock portfolio today.


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