A 14% fall in the FTSE 100 may be sufficient to cause most investors to worry about the prospects for the index. After all, it’s more than two-thirds of the way towards a bear market. And, with the index having dropped by that amount since reaching a record high mid-way through 2018, it’s unsurprising that many investors are now adopting a cautious approach.
The reality, though, is that such falls can offer the best buying opportunities for long-term investors. The history of the stock market shows that in order to buy at a low price level, there must be risks facing investors. And while the short-term future for the world economy may be uncertain, the reward potential from investing in the FTSE 100 appears to be high, in my opinion.
Risks
At any given time, there are risks facing investors. Sometimes, they’re clear and can be factored into valuations. At other times, they’re unexpected and it’s not possible to fully plan for them. As such, there’s no perfect time to invest in shares. There’s always the danger of loss, either from known or unknown risks.
Currently, there are a range of known risks facing investors which have been present for a number of months. For example, the inevitable tightening of monetary policy in the US has the potential to slow economic growth, while the declining growth rate in China has been a recurring news item in recent years. Alongside this, there’s a risk of increasing protectionism – especially between the US and China. All of these risks, plus Brexit, may have a negative impact on the performance of the FTSE 100.
Returns
However, the fact that there are risks ahead shouldn’t necessarily dissuade investors from buying shares. As mentioned, risks are omnipresent, and the major ones facing investors may already have been priced into the FTSE 100’s valuation. It currently trades at the same level as it did almost 20 years ago, which suggests that it may include a margin of safety.
Looking back on the best times to buy shares over the last couple of decades, two time periods stand out. The aftermath of the dot com bubble in 2003, as well as the financial crisis in 2008/09. During both of these periods, many investors adopted cautious attitudes due to the significant risks facing the stock market and wider economy. And while they may have avoided paper losses in the short run, they may also have missed out on the opportunity to buy high-quality shares trading at low prices.
As such, now may seem to be a risky time to buy shares in FTSE 100 companies. In the short run, that attitude may prove beneficial should the index fall further. But, ultimately, lower share prices have historically offered higher long-term rewards. Therefore, the 14% decline in the index could present a worthwhile buying opportunity, rather than a reason to panic.
