Stock market downturns may be difficult for long-term investors to stomach, but they offer a major silver lining for those looking to invest in ASX value shares.
Tough times can bring down the share prices of quality ASX companies – effectively creating a sale on stocks.
Value investors tend to look for quality businesses with plenty of growth prospects that are trading at attractive prices. In other words, they aim to buy shares for less than their intrinsic value and wait for the market to clue on.
And the more the market – and share prices – fall, the more likely value investors are to deem prices 'attractive'.
Now, that all sounds fine and dandy, but if investing during a downturn were that simple we'd all likely be ASX millionaires.
So, how might one go about timing the stock market when value investing? There is a strategy that might help mitigate such challenges.
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The pitfalls of investing in ASX value shares
Most value investors will agree that timing the market is one of the trickiest, nay, near impossible aspects of investing.
There are plenty of metrics available to help determine if an ASX stock is trading at less than its intrinsic value – such as price-to-earnings (P/E) and price-to-book (P/B) ratios. However, there's no such simple way to know if the market has finished bidding an ASX value share down.
There's nothing quite so disappointing as snapping up a 'bargain', only to see its share price tumble further over the coming weeks and months.
Unfortunately, the only way to truly see the bottom of a market downturn is with hindsight. Though, there's one strategy I would use to mitigate the risks of value investing.
Buying in thirds
One way to offset some – but not all – of the risks of investing in ASX value shares during a downturn is to buy a third of a planned parcel at a time.
Let's imagine I was planning to invest $1,000 in a share I believe to be good value but was worried it might still have a way to fall.
I would invest just $333 when I recognised it as a stock worth buying. If it then continued to fall, I would invest another $333. If it plummeted even further, I would buy another $333 worth – assuming I still consider the figurative value share to be worthy of a spot in my portfolio.
By employing this rule I ensure that, if my investment's value continues to tumble, I've stretched my money further than I would have otherwise.
Meanwhile, if the stock trades flat over my considered time frame I wouldn't come out any better or worse.
Finally, if my investment rockets before I buy my second or third parcel, I would still garner some exposure to a value share at its cheapest and be on track to benefit from a stock market recovery.
Of course, risks can also be partially offset by building a diverse portfolio of ASX shares.
