On Friday, there was reason for good cheer in the stock market. The FTSE 100 hit a new all-time high of 7,906 points, taking out the previous record from several years back.
Despite some flagging up a disconnect between the index and the UK economy, here’s why I’m not worried about pausing my investing strategy right now.
Valid reasons for concern
There are two main reasons why some might be worried about investing right now. One big factor is human psychology. Buying something when the price is high isn’t appealing. We all want to get a good deal, be it with food, clothes, or indeed stocks! It’s harder to justify to ourselves that we’re doing the right thing in buying at an elevated level.
The other reason that has been mentioned is the state of the UK economy. Let’s face it, the UK isn’t in a great place right now. The latest IMF forecasts show the country will have the worst growth performance in developed economies this year (with a GDP fall of 0.6%). So if this is the case, why should I be buying UK stocks? Surely it makes sense to hold my funds in cash instead, to be able to pounce if we get a market slump from the bad news.
Misplaced thinking
Let’s address the point regarding the UK economy and the stock market. It’s a misconception that the FTSE 100 is made up of domestic firms that solely trade in the UK. This isn’t the case at all. The index is made up of the largest companies by market capilistilsation.
For example, at the start of this year, the largest company was BHP Group. It’s an Australian mining company that has operations in places such as Chile and Canada. Sure, it’s headquartered in London, but how much impact does the UK economy have on the business revenue? Very little.
The other point relating to buying when the market is high is valid. However, there are several ways around this.
As a starting point, I’m not wanting to simply buy a FTSE 100 tracker. I want to find value in buying a select group of stocks within the index. I can filter using the price-to-earnings ratio to find companies that aren’t currently overvalued. My usual barometer is that if the ratio is below 10, the current share price offers me good value to consider investing.
I’m still investing
Despite the record numbers hit last week, I’m not going to sit on my hands and do nothing. I’m happy to hunt out good multinational businesses that have attractive valuations. I’m also content to keep investing in shares with a generous dividend yield. So even if I am wrong and we do see the FTSE 100 head lower, I can keep picking up income until the market recovers.
