The FTSE 100 index has fallen sharply over the past few days. Mr Market was spooked after the collapse of Silicon Valley Bank over the weekend.
Despite a rescue deal, investors remain concerned about a potential banking crisis. That would explain why the Footsie’s tumble has been led by bank shares.
Timing the market
Historically, large declines in the FTSE 100 have often been opportunities for long-term investors to grab a bargain. This large-cap index holds many mature and established global businesses.
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But have we already experienced a big decline or is this merely the beginning?
It’s difficult to answer that question, and I’d be attempting to time the market. While that can work sometimes, there is a more reliable way.
The old investment adage, “time in the market beats timing the market” comes to mind. I’d say it’s one of the golden rules of long-term investing.
The idea is that investing for many years is a simpler and more reliable strategy than trying to predict the ups and downs of the market.
By trying to consistently time the market, I could miss the best days. And that could result in much lower returns for my investment.
Pound cost averaging
If I had spare cash to devote to a new long-term plan, one strategy I’d use is pound cost averaging. The idea here is to invest a fixed amount at regular intervals.
For instance, I’d set up an automated investment plan to buy shares in a FTSE 100 index fund every month.
Doing this has several benefits. First, it allows me to buy shares at lower prices every time the stock market tumbles. This smooths out the ups and downs of volatile share prices.
Second, it frequently adds new money to my ISA. This is a key component to building long-term wealth. The more I can invest every month, the larger my pot could become in the future.
Finally, it removes the emotion from investing. Greed and fear are large components of investing, and they often get in the way of successful long-term investing. I’d expect pound cost averaging to disregard these psychological factors.
Diversifying
In addition to a FTSE 100 tracker fund, I reckon I can pick out some high-quality individual shares to buy.
Much like veteran investor Terry Smith, I prefer shares that demonstrate a high return on capital employed. It shows how efficiently a business can turn capital into profits.
Shares that highlight a sustainable competitive advantage also appeal to me. This is what Warren Buffett refers to as a moat and it can be in the form of superior technology, patents or brands.
There are several options from the Footsie that meet my criteria. But I’d pick a few of the very best, ensuring that I diversify across several sectors. That would avoid putting all my eggs in one basket.
If I had spare cash right now, I’d dive in and buy BP, B&M European Value Retail, and Experian.
All three are high-quality businesses that offer good value, in my opinion. Share prices could remain volatile in the near term, but that’s a risk I’m willing to take.
