Should you really buy stocks right now? | Smart Change: Personal Finances

In July, analysts at Bank of America came out with a pretty bleak forecast for the S&P500 through the end of 2022. They revised their year-end target for the benchmark from 4,500 to 3,600 at the end of this year.

With the S&P 500 at 4,200 on August 25, that would mean it would fall another 14% by the end of the year, on top of the 12% it is already down. And the Nasdaq Compound is already in bearish territory, down about 20% year-to-date to Aug. 25.

That’s not to say Bank of America’s forecast will be correct. The market could skyrocket the rest of the year. But the uncertainty caused many investors to sit on the sidelines and wait for the market to head back north. This begs the question: should you really buy stocks right now? While it’s smart to be cautious, it’s also smart to be opportunistic. Here’s why.

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Bad news can be good news

You’ve probably heard Warren Buffett’s famous joke: “Be greedy when others are fearful and be fearful when others are greedy.” This is easier said than done for the average investor, but the most important point is that bear markets are a great time to find good, cheap stocks that will grow and prosper when the market recovers.

As Buffett himself said The New York Times in 2008: “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a discount.”

Some of Buffett’s best and most lucrative buys have taken place in falling markets. buffet bought Berkshire Hathawayin August 2011, when it was trading at around $6 per share. It now trades at $35 per share, although it is down 21% year-to-date. Yet that investment posted a 17% annualized return for Buffett.

Now, not all investors have Warren Buffett’s expertise or background, but just like after the Great Recession, there are plenty of good stocks available at low valuations right now, if you know where to look.

What to look for

The first thing to know is that bear markets do not last as long as bull markets. According to an analysis of Hartford Funds, the average bear market lasts about 289 days, or just over nine months, while the average bull market lasts about 991 days, or 2.7 years. Additionally, stocks lose an average of 36% during a bear market and gain 114% in a bull market.

It’s also worth noting that about half of the S&P 500’s best days over the past 20 years have occurred during a bear market, while another 34% have occurred in the first two months of a bull market. So there is indeed value to add to your current stocks or invest in new stocks.

But be careful, because there are still a lot of uncertainties. Your best bet is to find companies that have seen their valuations fall, as measured by the price-to-earnings (P/E) ratio, the price-to-book (P/E) ratio, or the price-to-sales (P/E) ratio. S) ratios. Also look for established companies in their industries or markets with a history of consistent increases in profits and revenue.

Generally speaking, stocks that still have high valuations, a disproportionately high amount of debt, relatively low cash flow, high expenses and an uneven track record of profitability or earnings should raise red flags.

So yes, you should be looking to invest in stocks right now, but proceed with caution and do your research.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.