We’re into another month and, after posting its worst quarterly fall since June, the FTSE 100 (FTSEINDICES: ^FTSE) keeps on declining. This shouldn’t be surprising — there’s a well-established pattern that the market goes down one in every three years. You shouldn’t be fearful of this. Let others do the fretting for you.
Imagine instead what it would be like if the market kept on rising. In the last ten years the FTSE 100 has risen by, on average, 5% a year (rounding up). What if it were double that? Would you be pleased with an average return of 10%? I’m sure you’d probably say yes.
And what if that return were guaranteed? Again, you might answer yes, although I’m sure a fair few of you would actually inquire “what’s the catch?”
A smart question. You know the phrase ‘cash is king’? Well, in this scenario, cash would be in squalor, having pawned its crown to live in a spider ridden bedsit with a leaky roof.
Everyone would be piling into shares! Prices would go up and up until the paltry 0.5% interest rate you can from a cash savings account would look distinctly appealing. That is, the bubble would eventually burst, and your shares would be worth zero.
Volatility, therefore, is essential. It’s a prerequisite to the market steadily rising over time.
Boom and bust
True, it isn’t pleasant to see large swathes of your portfolio flashing red, but I’d be a whole lot more concerned if it only ever flashed green.
So, if the worst time to buy is when the market advances to the extent that prices are unsustainable, when is the best time to buy?
Given that the FTSE 100 has tumbled by more than 200 points so far this year, now looks like a great buying opportunity.
Take a leading blue-chip like Tesco (LSE: TSCO). Its shares are down 11% with the entire grocery sector facing innumerable headwinds.
Discount stores like Aldi and Lidl are pinching market share and the only way to compete appears to be an all out price war. Investors, fearing imminently worsening prospects for Tesco, have pushed its share price to within bargain range.
Undeniably, this is easier said than done, but it pays to stand aside from the herd. Indeed, how else can you gain an edge on the market?
Consider that, as Tesco’s online operation continue to gain a foothold, there could be huge potential upside. Or that nearer term, its margins provide a useful buffer in the event of a price war.
