In the last week, the FTSE 100 has fallen by as much as 5% in what has included its biggest one-day fall in around three years.
Clearly, investors are becoming increasingly unsure about the prospects for the global economy during a period that includes significant risks, such as US political uncertainty and the global trade war.
While this may naturally cause many investors to determine that now is a good time to sell their holdings in order to avoid potential losses, the reality is that buying shares for the long term may be the most logical response to the FTSE 100’s recent decline.
Risky outlook
With the FTSE 100 having fallen heavily in the last week, it could come under further pressure in the near term. Investor sentiment has taken a sharp decline of late, with the global trade war likely to remain a drag on the index’s performance over the coming months.
There is little sign of an end to the ramping-up of tariffs placed on imports by a variety of economies, including the US, China and the EU. This could produce a lower rate of economic growth over the long run, which may cause investors to price-in lower valuations for a variety of FTSE 100 shares in the meantime.
Buying opportunity
Investors who are concerned about their short-term portfolio performance may decide to sell their holdings in order to purchase less risky assets. For long-term investors, though, such a strategy seems to be illogical. After all, they generally seek to purchase high-quality businesses when they are trading at low prices, with the aim being to sell them at high prices further down the line.
As such, at a time when the FTSE 100 is trading on a lower price level than it has over recent months, today could represent a better buying opportunity than when the index traded at a higher price. In other words, share prices are lower, and the margins of safety they offer are higher.
History shows that buying during periods of uncertainty for the wider economy and stock market can be a beneficial strategy. It may not produce high returns in the short run, but the cyclicality of the stock market means that patient investors who are not overly concerned about the performance of their portfolios during periods of uncertainty can use the ups and downs of the FTSE 100 to their advantage.
Diversification
Of course, diversifying among a range of stocks is paramount to keeping risk at a relatively low level. Since the FTSE 100 has an international focus, it is fairly straightforward for an investor to obtain a high degree of international diversity in order to potentially limit risks such as Brexit and a possible slowdown in the growth prospects of Asia.
Through buying a mix of high-quality businesses at fair prices, any investor can increase their chances of generating high returns. For companies to trade at lower prices, there usually must be heightened risk. While this may mean a period of volatility, it can afford opportunities to ‘buy low’ for long-term investors.
