Investing £1,000 in FTSE 100 shares, or any amount for that matter, could be a prudent move for investors today. That may seem like a crazy idea, given the ongoing stock market volatility. After all, it’s not unrealistic to expect valuations to decline further, given the economic turmoil the UK is currently enduring.
However, the stock market is a forward-thinking machine. And therefore, the impact of even a steep recession could very well already be priced into market capitalisations today. Not to mention that the primary issues creating such uncertainty are ultimately short-term.
In the long run, terrific businesses will likely continue to thrive. At least, that’s what history would suggest. Don’t forget the FTSE 100 and other flagship indices have a perfect track record of recovery from even the more dire crashes and corrections. In other words, now could be an opportune moment to build a high-quality, diversified portfolio at discounted prices.
Avoiding FTSE 100 investing traps
Overall, the FTSE 100 index is actually trading above pre-correction levels. But not all of its constituents have been so fortunate. And many companies continue to trade at valuations below their historical averages.
Does this mean investors should just buy the stocks that have yet to recover? No. In fact, that’s likely a recipe for disaster. Why? Because, in some cases, the depressed valuations may very well be justified.
Inflation and rising interest rates are harming even the best businesses in the world. But for some, it could be a death sentence. Overleveraged companies with lacklustre financial reserves could very well be on the path of insolvency. And given that the Bank of England is likely to continue raising interest rates in 2023, the situation may continue to deteriorate.
Therefore, buying shares in potentially compromised FTSE 100 enterprises is likely a bad idea. Fortunately, the index is also filled with terrific businesses trading at a discount due to low investor sentiment. And while the markets may continue to be volatile in the short term, successfully identifying and investing in these opportunities could prove highly lucrative in the long term.
Managing risk
One of the most powerful and easy-to-use risk management strategies available to all investors is diversification. By spreading an investment portfolio across multiple companies in different industries, the damage of one position failing can be mitigated by the success of others.
Fortunately, there are FTSE 100 shares in almost every sector, granting investors plenty of choices. But with only £1k at hand, building a well-diversified portfolio by picking individual stocks isn’t realistic when accounting for trading fees.
Therefore, if an individual is unable to contribute additional capital regularly in the future, it may be wiser to invest in a FTSE 100 index fund instead. This provides exposure to every business within the index in just a single transaction with minimal fees to worry about.
For those comfortable with taking on additional risk and a much more concentrated portfolio, picking individual stocks is still an option. Poorly selected companies could easily backfire and destroy wealth. But becoming a successful stock picker opens the door to market-beating returns, especially during a stock market correction.
