The mood of the market has certainly changed over the last month. In May, we saw the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) climb to its highest level since 2008 driven by spectacular gains from Australia’s largest blue chip companies. However, circumstances have changed and investors are now wondering whether now is a good time to buy stocks.
First of all, let’s get one thing straight – no investor or analyst can know for sure where the market will go next. Many have tried to time the market – buy in at the lowest point and sell at the highest – and whilst some have succeeded, it has been by pure chance. In May last year when the index was sitting at around 4,000 points, for instance, the market began to climb. Investors who chose to wait for a market crash missed out on the market’s massive gains that were seen over the next 12 months.
Since its high of 5,250 points, the index is now 9.8% lower, and is offering some very attractive discounts. Instead of waiting for the market to fall even further (which may or may not happen), investors should embrace the market’s offerings.
So what stocks should you buy?
Just because some stocks are trading lower than they were doesn’t automatically make them attractive. It seems that one of the most popular questions on investors’ minds is whether they should jump on board with the banks and supermarkets, given their setbacks in the last few weeks. Westpac (ASX: WBC), for instance, has fallen 19% since the beginning of May. Similarly, supermarket giant Woolworths (ASX: WOW) has fallen 13.2% and telecommunications behemoth Telstra (ASX: TLS) has fallen 11.7% in the same timeframe.
Whilst these stocks could recover over the next few months and give investors short-term gains, they are unlikely to deliver market-beating returns in the long run.
Instead, investors should seek out quality companies that the market has not yet picked up on. Companies such as NIB Holdings (ASX: NHF), Corporate Travel Management (ASX: CTD) and Vocus Communications (ASX: VOC) are currently sitting at very reasonable prices and have enormous future potential.
With the level of volatility in the market, share prices could certainly fall further. When making a purchase however, It is important to remember that you are buying companies as opposed to simply buying shares. When buying into companies that are reasonably priced and have outstanding potential, the long-term should give you good returns, regardless of whether its value falls tomorrow or the next day.
Meanwhile, The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!
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Motley Fool contributor Ryan Newman owns shares in NIB Holdings.