Like many British investors, a fair bit of my portfolio is invested in FTSE 100 shares such as British American Tobacco and JD Sports. Over the past year, I have watched with interest as the American Dow Jones Industrial Average has lost 10% of its value while smaller-cap UK index the FTSE 250 is down by 19%.
Yet despite what I see as weakness in the British economy right now, the Footsie has actually added 5% to its value over the past 12 months. Does this suggest that we could now be heading for a big fall?
The perils of market timing
Not necessarily.
What I am confident about is that the FTSE 100 will fall at some stage — as all markets do. That could be tomorrow. But it might also not happen for a decade, or more. There is simply no reliable way of timing the market or else I think most investors would use it.
I could get out of the market and wait until a crash before buying again. But the problem with that approach is that trying to sit out a crash could also lead to me missing some brilliant opportunities.
Valuations look reasonable
The FTSE 100 is currently trading within 6% of its all-time-high price. That makes it sound like it may be fully valued if not overvalued. In that case, there could be a long way to fall whenever the next market crash comes.
But stepping back from the overall index and looking at individual shares, many do not seem overvalued to me. If anything, I think the opposite. From banks to miners, a range of blue-chip firms are trading on price-to-earnings ratios in single digits.
Partly that reflects mounting concerns about the economy, such as the impact falling commodity prices might have on profits for miners like Rio Tinto. Nonetheless, I think a lot of shares in the FTSE 100 look attractively valued at the moment as potential acquisitions for my portfolio.
Should I prepare for a FTSE 100 crash?
Despite that, I do recognise that the Footsie may yet crash.
For example, a valuation metric based on earnings can suddenly make a stock look more expensive if a company’s earnings fall. There is also the possibility that investors may pull their money from the market out of a sense of concern. That could drive prices down even if the fundamentals of a given company remain strong, dragging down the index.
For me as a long-term investor, however, that presents a buying opportunity. Rather than try to time the market, I am focussed now on finding what I think are great companies selling at attractive prices. If the FTSE 100 does take a tumble this Autumn – or later – I will hopefully find even more such opportunities I can buy and hold for the years to come.
I am not concerned by the prospect of the next crash, whenever it arrives.
