The past few days saw the FTSE 100 index finally give back some of the significant gains it has racked up since late March. Now many investors are wondering if the market may crash yet once again.
My short answer to the question is: yes, at some point, FTSE 100 shares will likely crash again. However, it would be impossible to know the exact date and the extent of such a crash. Therefore, I’d urge retail investors not to worry about where share prices may go in the short run. Instead, they should focus on their retirement goals and how regular investing could help them achieve those goals.
Timing market crashes
The common denominator in market crashes is that it is almost impossible to know when exactly they will start or end. Market timers aim to improve their portfolio returns by selling at market tops and buying at market bottoms.
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For example, they may attempt to predict the winning FTSE 100 companies. Or they try to choose the right shares at the right price and at the right time.
Sounds easy? Probably not. The everyday reality is individual investors are usually wrong when attempting to time the markets. Most of us have no edge or advantage, especially against market professionals. Let’s not forget supercomputers that execute trades on complex data algorithms and create short-term volatility either.
It is tempting to think we are somewhat better than others, especially when it comes to predicting the market turns. But it is rather challenging to keep a cool head, especially when the markets and value of one’s portfolio are falling and the news is full of doom and gloom.
Put another way, most retail market timers act upon their emotions and sell at the height of the panic. But then they potentially miss out on the gains when the markets recover – and yes, markets do recover.
Diversifying
In investing, risk and return go together. There may be a potential return as well as a possible loss. Therefore, instead of trying to time the market crashes, I’d look to diversify my portfolio.
Have you decided how much of your wealth you would like to have in equities? Then it’s time to determine how you want to allocate your money among different types of shares.
Investments that pay and grow can be a reliable path to creating retirement wealth. So I’d look for shares that ideally pay dividends and have the potential for capital appreciation.
Among FTSE 100 shares, I believe AstraZeneca, BAE Systems, Diageo, Mondi, Polymetal International, Prudential, Tesco, Unilever and Vodafone could be solid picks for long-term portfolios.
If markets crash again, investors could buy top-quality shares at discounted prices to jump-start their portfolios.
Diversification will not eliminate all the risk in your equity portfolio. But your long-run risk/return ratio is likely to be more attractive. A share portfolio constructed of different kinds of companies and sectors will, on average, yield higher returns and enable you to ride out the volatility of the stock market.
Buying shares for the long term
At The Motley Fool we believe in holding shares for the long term. Well-performing stocks tend to keep on winning. A market crash might allow you to buy more into those shares at lower prices as long as you still believe in those companies’ fundamental stories.
