It was only a short while ago that the FTSE 100 was hitting record highs. Now suddenly, the magical 8,000 mark seems a distant dream.
A cheaper main market
Funnily enough, a strong stock market can make investors nervous. So, a falling market, psychologically speaking, is when I like to invest, particularly when the index still looks relatively cheap.
According to Ben Laidler, Global Markets Strategist at eToro, it is cheap. He believes “the mix of low valuations (40% P/E discount compared to the S&P 500), high dividends, and a sector mix of commodities, banks and staples, is attracting investors”.
Fascinatingly, eToro’s platform data shows that more UK retail investors are buying FTSE 100 companies this year relative to the last. The proportion holding at least one FTSE 100 stock has risen 11%, while those holding at least five shares is up 17%.
Laidler attributes the growth in part to DIY investors like me “taking advantage of the lower prices and valuations of the recent correction”.
Clearly, I am not alone in snooping around for a FTSE 100 bargain. But with the index edging lower, and inflation and rates higher, should I really be investing now?
Time in the market beats timing
Yes, is the short answer. Research from Princeton University shows that if I stay invested over the long run in a well-diversified portfolio, I’ll receive better returns than trying to profit from turning points in the market. The research is essentially saying it’s a bad idea for me to time the stock market.
Ideally, I would wait for the current FTSE 100 correction to bottom out. Then invest all my money and ride all the way laughing to the top of the next peak. However, as the research suggests, identifying market bottoms or tops is virtually impossible.
This is where the pound cost averaging is most relevant. It’s a way my portfolio can benefit from the market’s ups and downs, without me having to time anything.
Put simply, if I had £1,200 to invest this year, I would make more money investing £100 a month than trying to time the market and invest the lump sum at a certain point. If the market is falling, it’s even better for me. I would be buying in at a lower price each time and thereby reduce my average cost.
Long-term gains
So, it is clear as day to me that investing periodically, even when markets are falling, can enhance my future return.
Falling markets don’t scare me. They make me want to invest. With the new tax year’s ISA allowance about to kick in, it’s a great time to load up on some tax-free FTSE 100 bargains.
The big secret regarding equity markets, is that they tend to grow over the long term. For decades, that’s primarily what they’ve done — with plenty of falls and crashes along the way.
So, of course it’s the right time for me to be investing in the FTSE 100. As long as I do it on a systematic basis. This way I’ll never be fussed about whether markets are falling or rising, and benefit either way.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
