Investing in the FTSE 100 could be a sound long-term move. Although there may be some risks facing the index, such as global protectionism and rising US interest rates, the prospects for a number of stocks appear to be bright. Similarly, their valuations could suggest that they offer margins of safety, which may mean that their risk/reward ratios are appealing.
With that in mind, here’s how I would go about investing £3,000 in the index over the long term.
Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!
While diversifying with £3,000 may sound challenging, that task could be made easier through the use of aggregated orders. This is essentially where a share dealing provider executes the orders of a range of clients in a single stock on a specific day. It therefore provides an investor with less control over the price they pay, but when investing for the long term, this may not make a huge difference.
Where aggregated orders have an advantage is in reducing share dealing costs. In fact, some share dealing providers offer the service for as little as £1.50 per trade. For smaller investors, this could lead to higher long-term returns.
One area which may be worthy of investment at the present time is putting your cash into stocks that can offer defensive growth prospects. They may, for example, have business models that benefit from a competitive advantage, or their financial performance could be less highly correlated to the prospects for the wider economy. Their shares may therefore offer greater stability than those of their index peers.
Given the uncertain outlook for the FTSE 100, sectors such as pharmaceuticals, tobacco and consumer goods may therefore hold significant appeal. Companies operating in those sectors may not be the cheapest around, nor might they offer the highest rate of earnings growth in the index, but they could deliver dependable profit growth over a sustained period. As such, they may become increasingly popular among investors, which could lead to higher valuations in the coming years.
While the FTSE 100 is an internationally-focused index, it still generates a sizeable minority of its income from within the UK. With Brexit fears being relatively high, there could be a number of value investing opportunities on offer for companies that have significant operations in the domestic economy.
At the same time, though, the growth potential of emerging markets such as China and India remains high. Both countries are forecast to post GDP growth that is significantly higher than the UK over the long run, and this could catalyse the performance of a number of companies operating in those two countries, as well as in the wider developing world.
Certainly, rising US interest rates are a threat to developing nations with high debt levels. But with a number of internationally-focused FTSE 100 stocks appearing to have sound growth strategies, they may be able to generate high returns for investors over the coming years.