Investing in FTSE 100 shares is usually daunting. You’ll be parting with hard-earned money for something that may eventually go down in value. This is especially true at the moment, as the market still reels from the effects of coronavirus.
It’s a dangerous time to be an investor. But if the hard work is undertaken, this could be the buying opportunity of a lifetime.
I’d do the following three things before purchasing shares.
Eliminate debt before investing in the FTSE 100
If you have a large amount of debt, it might be wise to pay this off before buying shares. The interest rates for credit cards or car loans can often be higher than realistic investing returns from the FTSE 100.
As Albert Einstein allegedly said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Ultimately, you want your money to be working for you. Although it will be tough to see this FTSE 100 buying opportunity pass, priorities need to be set. I’d clear high-interest debt first, then use any spare cash to invest in quality FTSE 100 shares.
Due diligence
When I’m looking at prospective FTSE 100 companies I want to buy shares in, I spend time reading as much about the organisation as I can. I want to know about its various revenue streams, the locations it operates in, debt levels, profitability, growth prospects and the people behind the business.
Sometimes it helps to imagine you are buying the whole company. You probably wouldn’t buy a corporation on the suggestion of someone from the pub. Instead, you’d want to gain an understanding of the long-term viability of the organisation.
I also like checking out the competition, to see which company has the edge. This could take any form, from better products to more effective management. I want to be certain my money is backing the right company.
Read, read, read
Apparently, Warren Buffett spends about six hours a day reading. Like a sponge, he soaks up the information he reads in newspapers and company reports.
Of course, most of us don’t have that amount of time available to read. Although it’s important to keep on top of business news and balance sheets before investing in FTSE 100 shares, there are other ways to gain this knowledge.
As well as reading business news, it’s also worth listening and paying attention to what people are doing. Being engaged with the investing part of your brain can pay off. For example, if your partner mentions a particular new product, it could be worth looking at who manufacturers it and digging a bit deeper.
Peter Lynch mentions similar conversations he had with his wife in his book, One Up on Wall Street. This consumer insight helped him discover stocks that investors on Wall Street were overlooking.
There’s no shortcut to successful investing. But with a few simple steps, I think some of the current risks can be mitigated and market conditions can be taken advantage of.
