With the FTSE 100 having recently posted fresh all-time highs, above 8,000 points, it raises questions about whether now is the best time to be investing my hard earned cash.
Obviously, I’d prefer to buy FTSE 100 stocks that are cheap, rather than paying over the odds. Yet despite the index pushing higher, there are still several reasons why I’m not against buying shares at the moment.
Looking at the valuation
The current price-to-earnings ratio of the lead index is 11.45. Ironically, this is at one of the cheapest levels in recent years. Back in 2019, and for a good portion of 2021, the ratio sat around 15. Sure, share prices have moved up, but the earnings of the companies have also increased.
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As a whole, anything with a ratio of 10 or less is in undervalued territory, in my opinion. So although 11.45 isn’t dirt-cheap, it’s certainly not expensive if I buy now.
Buying individual names
Even though the index is at high levels, I need to remember that I don’t have to buy the entire index. Its performance is a blend of all the constituents and how each has performed.
When I dig deeper, I can see there are 10 stocks that have fallen by at least 20% over the past year. Granted, I don’t think all are screaming buys right now, but there are certainly options I can find that look appealing.
Forward-looking ideas
If I assume the economic theory that a share price reflects all current public information is correct, I can find another good reason to buy now. I feel the current sentiment among investors isn’t that positive. Economic forecasts indicate the UK will have negative economic growth this year.
So think about how the stock market could perform next year when the economy starts to recover. When more positive data arrives and sentiment improves, the FTSE 100 could move higher still.
Enjoying dividend income
Even if I feel the index will consolidate around 8,000 points and not move much higher this year, I can still generate profit. This is via dividend payments. At the moment, there are 19 FTSE 100 stocks with a dividend yield above 5%. Provided the dividend per share stays the same this year, that means I’ll make £50 for every £1,000 invested.
And when I invest regularly each month, this income can quickly start to stack up.
Points to be aware of
One risk is that we get a sharp UK recession this year, which triggers a stock market crash. In that case, very few stocks would likely finish the year in the black.
I’m also conscious of the human bias that makes me reticent (despite the above reasons) to invest at lofty levels. Therefore, to lower my risk, I’m happy to split my investments over the coming months. Instead of piling in all my free cash today, I can stagger purchases across the weeks to come.
