Investing in shares at a time when the FTSE 100 is close to a record high may not seem like such a good idea. After all, the aim of investing is to buy low and sell high. However, just because the index is in the midst of a Bull Run and investor confidence is high does not mean that shares should be avoided. Rather, being more selective about the stocks which are purchased could be the best means of generating high returns.
Although cyclical stocks have proven to be exceptionally strong investments in recent years, in many cases they lack resilience. This means that should the economic outlook deteriorate over the medium term, their financial performance could do likewise. Therefore, it may be worth focusing on companies which have resilient business models. They may be able to offer upbeat growth potential through the economic cycle.
For example, stocks which were able to perform well in the aftermath of the financial crisis could be a good place to start. Some companies were able to outperform their industry rivals due to their focus on a value offering that resonated well with customers. Similarly, defensive sectors could also have appeal at a time when many investors are more interested in cyclical growth plays.
Clearly, no investor ever wants to overpay for any stock. With share prices being generally high, this may seem a more difficult goal to achieve. However, just as valuations have risen, the prospects for a number of companies have also improved in the last few years. This may mean that when growth prospects are factored-in, the current valuations are not significantly more expensive than they have been in recent years. This could offer new investors a wider margin of safety than would normally be expected during a bull market.
For example, global consumer goods companies are currently enjoying a tailwind. Emerging market growth continues to be a key driver, and this is unlikely to come to an end in the near term. Wage growth in the developing world continues to boost demand, while regions such as the US and the Eurozone have seen their economic performance improve of late. There is therefore an opportunity to capitalise on a generally high global growth rate, with this making higher valuations less obstructive to new investment.
Looking ahead, there could be significant volatility for shares. While the general trend may be an upward one, risks concerning Brexit, North Korea and political changes in the US may contribute to periods of disappointment for investors. This means that having some spare cash available could allow an investor to take advantage of buying opportunities.
Certainly, higher inflation may be making cash returns even worse in real terms. But for investors seeking a long-term view, investing only part of a lump sum in stocks with resilient business models, sensible valuations and which operate in global growth sectors could be a shrewd move.
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