Investor sentiment can change incredibly quickly. Just a couple of weeks ago, investors were worried about the prospect of a bear market following the FTSE 100’s 12% fall from its all-time high in May. Now, after two weeks of gains that have seen it rise by around 2%, the focus has switched to the prospect of a recovery for many investors.
Clearly, this is a relatively uncertain time for share prices. Here’s how it could prove to be an opportunity for the long term.
Cash is king
While share prices may have recovered to some degree over recent weeks, the reality is that the risks which caused the 12% decline in the FTSE 100 remain in place. For example, there’s still no Brexit deal, US interest rates could rise at a fast pace and choke-off the world’s GDP growth rate, while additional tariffs could be enacted by the US, China, or any other major economy.
As such, it may be logical for investors to keep some spare cash on hand in case there’s a further fall in share prices. Given the fluid geopolitical outlook for a number of the world’s major economies, it would be unsurprising for the FTSE 100 to resume its downward trend of recent months.
Long-term focus
As mentioned, investor sentiment can change exceptionally quickly. This could leave investors in a state of confusion as to where the market will move to next. Further ups and downs could be ahead, and a focus on intra-day movements may provide minimal insight into where the index will be trading in the coming years.
As a result, it may be worthwhile for investors to focus on where share prices could be in three-to-five years’ time. Doing so could not only provide clarity when it comes to making investment-related decisions, it may also help an investor to avoid becoming fearful of further falls. As ever, finding the bottom of the market is exceptionally challenging. Instead, focusing on the values of high-quality businesses, with strong long-term growth potential, could be a better use of an investor’s time.
Defensive
With a number of risks facing investors at the present time, it may be logical to own some stocks that offer relatively resilient growth outlooks. They could provide a degree of stability in the event of further declines for the FTSE 100, and may also offer a strong income return to compensate for potential capital losses. Companies with strong balance sheets and track records of growth in varied economic circumstances may be worthy of consideration – especially if risks to the stock market remain in place.
Of course, owning some cyclical shares may also be a good idea. And a volatile FTSE 100 could be an opportune moment to buy less popular stocks. The key takeaway for investors, though, is that risks remain. And while there could be further volatility ahead, declining stock markets have historically been a good time to buy shares for the long run.
