Both the FTSE 100 and the S&P 500 are close to their all-time highs. So it’s easy to see why investors might think now isn’t the time to be starting a Stocks and Shares ISA.
I’m sceptical of this, though. And there are three reasons why getting started with an investment portfolio right now could be a very good idea.
Waiting is risky
The first reason is that waiting for share prices to fall is risky. The fact stocks have been going up doesn’t mean they’re about to come down.
In fact, I think there’s good reason to believe they won’t. Interest rates are falling in the UK and this looks set to boost share prices for a while yet.
The FTSE 100 is up 6.5% so far this year. If it does the same again over the next 12 months or so, it will take a 12% decline to get prices back to where they were in January.
I think it would take something major to move the index by that much and I wouldn’t be willing to bet on it happening. So waiting for a better opportunity looks risky to me.
Market highs don’t rule out good results
Another reason is that investing when the stock market is expensive isn’t always a bad idea. The FTSE 100 peaked in January 2020 before falling 33% in two months during Covid-19.
It would be an extremely unfortunate bit of timing to be investing just before that kind of crash. But things have gone ok for investors who bought shares just before the pandemic.
For one thing, the index is 7% higher since then. On top of this, a 4% dividend means someone who invested £1,000 in the FTSE 100 in January 2020 would have £1,250 today.
In other words, investing can still generate good returns even when the stock market is at its highs. The key is being able to stay invested for the long term and wait for returns.
A market of stocks
Lastly, even when the stock market as a whole is expensive, there can still be individual shares that are cheap. A good example is B&M European Value Retail (LSE:BME).
A recovering economy in the UK could cause consumers to look to more premium alternatives. That’s a risk with the company’s focus on a discount retail strategy.
Despite this, the stock looks attractive compared to the FTSE 100. The index trades at a price-to-earnings (P/E) ratio of 15 and has an average return on equity (ROE) of 11%.
B&M European Value Retail return on equity 2014-24
Created at TradingView
By contrast, B&M shares trade at a lower P/E multiple and achieve a higher ROE. And this isn’t just a one-off – the business has consistently achieved returns on equity in excess of 11%.
Getting started with a Stocks and Shares ISA
The major indexes might be higher than they were at the start of the year, but I don’t think that makes this a bad time to begin investing. And a Stocks and Shares ISA is how I’d get started.
Whether it’s through an index or by looking for specific opportunities, not having to pay tax on capital gains or dividends can be valuable over time. That’s why I invest through an ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
This post was originally published on Motley Fool
