As humans we are preconditioned to pay attention to things that seem dramatic. So it is no surprise that there tends to be so much speculation about when the stock market might tumble and what that could mean for investors.
What has perhaps been receiving less attention lately is the opposite question: what does it means for investors when the stock market booms?
With the FTSE 100 index of leading British shares having hit a new all-time high last week, that feels like a pertinent question.
At first blush, such a state of affairs can seem great.
You may look at your portfolio statement and discover that it is now worth more – perhaps a lot more – than you paid for it.
Again, human nature means that that is an enjoyable sensation. But it does also carry a risk: overconfidence.
Whether the market is riding high or tanking, it is always helpful to try and be honest with yourself about how much of your performance as an investor results from what you are doing, and how much simply reflects the broader market trend.
As billionaire Warren Buffett says, it is only when the tide goes out that you see who has been swimming naked.
A booming stock market can also mean that there are far fewer buying opportunities for an investor.
Higher prices can make many valuations less attractive.
Not only that, but dividend yields can go down. Calculating a yield involves the annual dividend per share, but also what you pay for that share. So, as a share’s price soars, in the absence of a big enough dividend increase, its yield will fall.
For an investor looking to buy shares at a great price, that can make for more difficult hunting.
But while a soaring stock market can reduce the field of potential bargains, that is not the same as eliminating it.
Take the FTSE 100 right now for example. It has put in a very strong performance in recent years – but I still reckon some individual FTSE 100 shares are possible long-term bargains.
For example, after growing 51% in the past year alone, the Phoenix Group (LSE: PHNX) share price might seem like an unlikely bargain.
However, I see a lot to like about the share. It yields 7.2% — well over double the FTSE 100 average – and the company plans to keep increasing its dividend per share annually.
With a customer base in millions, Phoenix has benefits of scale.
It also owns some powerful brands. Indeed, the company’s plan to rename itself Standard Life next month is a shift in the direction of making better use of those brands, which I see as positive.
