The recent stock market crash has caused the FTSE 100 to trade as much as 11% lower than its all-time high. While it’s still some distance away from a bear market, it’s now more than halfway towards achieving that status. In the short run, there could be further volatility ahead. This could lead to investors feeling unsure about how to manage their portfolios in what is a risky period for the top index.
Here are three areas that could be worth focusing on during what may prove to be an extended period of volatility for the FTSE 100.
Diversity
While Brexit may feel like the biggest risk facing investors in the UK, the reality is that other threats could pose more significant challenges to the FTSE 100. Since three-quarters of the index’s income is generated outside of the UK, the potential for a rapidly-rising US interest rate, and further tariffs being placed on imports, could cause the performance of companies across the globe to come under pressure.
As such, it may be prudent to not only diversify between UK and international shares, but also companies operating in different parts of the world economy. For example, owning shares with exposure to the US, Europe and emerging markets could be a shrewd idea, since they may be able to offer a degree of stability versus more concentrated portfolios. And with defensive shares also having the potential to provide more resilient growth outlooks, diversifying outside of cyclical stocks could be a good idea.
Dividends
With the FTSE 100 having fallen in recent months, the importance of dividends may become more obvious. Capital growth can come and go over the long run, and has the potential to provide significant returns for an investor. However, dividends are a relatively reliable income stream which, when compounded, can have an even bigger impact on total return over the long term.
Given that the FTSE 100 yields around 4% at the present time, it’s possible to generate a high yield from the index. This could mean that dividend shares are worth buying – especially if the potential for capital growth reduces as the prospects for global GDP growth worsen.
Buying opportunity
While buying shares during a period of market volatility may sound risky, it could move the investment odds further into an individual’s favour. High-quality shares may trade on lower valuations following a market crash, and this could improve their return prospects, as well as reduce their downside.
Certainly, further falls in market value may be ahead. This could lead to paper losses for investors who end up buying too soon. As such, buying frequently in small amounts during a market downturn could help an investor to not only obtain better-value shares, but to also avoid the fear and worry that can affect judgment during such periods. In other words, if an investor is seeking to buy cheap shares, they are likely to desire a lower price. This means that share price declines may be welcomed, rather than feared.
