Is it safe to venture back into the stock market yet, particularly given the ongoing low interest rate environment? That's the question that many nervous investors are asking, following a recent, albeit modest, rally in share prices after more than two years of bear market pain.
With the All Ordinaries sitting above 3050 points at time of writing, an increase of 14pc since March 2003, what nobody really knows is whether the bottom of the bear market has been reached or if there are further falls to come.
Although it is always hardest to contemplate making further investment if you have lost money, the fact is that the best time to buy is when prices are low. As Warren Buffett once put it, ³when others are greedy, be fearful; when others are fearful, be greedy.²
What is clear, however, is that if you wait for a tangible sign of stock market recovery, eg for the All Ords to reach a certain level, then by definition, you will have missed out on much of the gains to be made.
Many commentators would agree that share prices currently represent fair value and good buying.
Another argument for re-visiting the option of investing in the sharemarket is dividends. This approach - buying shares for the strength of their dividends rather than their immediate prospects for growth provides the double incentive of a regular dividend as well as the prospect of a real windfall in terms of capital growth if the equity market takes off again.
Industrial stocks are currently yielding on average just above 5pc which far exceeds the after-tax return from holding cash in the bank. For many, it also provides a kind of Œpatience payment¹ while investors wait for a rebound in the underlying value of shares held.
In selecting appropriate dividend stocks, basic investment fundamentals should be applied with particular attention paid to the company¹s ability to sustain the dividend.
This means reviewing the company¹s management expertise, industry in which it operates, state of its balance sheet as well as whether the dividend is fully franked (ie the tax is already paid by the company).
Whether now is a good time to re-enter the stockmarket is dependent on individual circumstances and should be made in conjunction with sound financial advice.
For those who have a reasonable timescale, at least four to five years, then history tells us that equities will provide a better return than cash or fixed interest investments.
* Ian Clarke is an Investment Advisor with Macquarie and a qualified Chartered Accountant.
He is well known throughout WA as the daily stock market commentator on Liam Bartlett¹s daily Morning Program on ABC Radio. Ian can be contacted on ?1800 199 019.