Since the start of the year, the market crash has caused the FTSE 100 to fall by 21%. Coronavirus and the subsequent damage it’s expected to cause to the global economy weighs heavily on investors’ minds.
There are signs of a slight rebound, however. The index has increased by 20% since its low on 23 March.
With reports in the media about the next recession, investors might be holding off buying shares in the belief that the market could fall once again.
Market crash
Any recovery for the FTSE 100 might indeed be followed by another market crash.
Share price fluctuations in the short term are notoriously difficult to predict. Even the greatest investors, like Warren Buffett, admit that it’s impossible to determine what will happen in the next few weeks, months or years.
Pound-cost-averaging
Instead, it’s normally better to invest with a longer outlook. By spending decades in the market, buying shares and reinvesting dividends, compound interest will have a chance to work its magic. This could help investors ride out the bumps and crashes along the way.
I think investors should consider trying to lower their risk by pound-cost-averaging. This can be achieved by setting up regular payments to purchase selected shares or funds. Investments might then be made when the market rises and crashes, but you’ll be able to buy the largest amount of shares when they’re cheap. Therefore, the returns to the investor will average out over time.
Historically, stocks and shares have tended to perform better than other assets over the longer term.
Cheap FTSE 100 shares
The latest market crash means that some quality companies are trading at a low valuation. For example, shares in Unilever have fallen by 3% in the year-to date. This drop means its stock is now trading at a price-to-earnings ratio of just 18. With brands like Marmite and Ben & Jerry’s in its portfolio, I believe that customers will still purchase its products even when the going gets tough.
And I’d focus on valuation rather than dividends (for now). Many companies in the FTSE 100 have suspended or cancelled dividends payments. Even Shell, previously loved by income investors, cut its dividend for the first time since World War II. Consequently, I’d rather buy stocks for the recovery potential than income prospects. That is why I’d buy cheap FTSE 100 shares in this market crash.
For investors anxious in these uncertain times, it’s helpful to look back at the history of the FTSE 100. Although the past might not repeat itself, it’s comforting to note that despite multiple crashes in its 36-year history, the market has recovered in the long term each time. Fellow Fool Peter Stephens has noted that in the past, the best buying opportunities have often coincided with the greatest periods of uncertainty.
Benjamin Graham, the mentor of a young Warren Buffett, said that investors must “believe in a better tomorrow”. Although we’re faced with unprecedented times, today’s investors really should believe that things can get better when they consider buying shares!
