The FTSE 100 is cheap and unloved. Is NOW the best time to buy?

The FTSE 100 (INDEXFTSE:UKX) looks great value, but would it be a mistake to buy now? Paul Summers looks at the arguments for and against investing in the UK’s top tier.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 closed at 5,843 last Friday. That’s almost 25% below where it stood at the beginning of the year (7,622). Back then, Boris Johnson had recently won an election and few people, aside from virologists, had ever uttered the word ‘coronavirus’.  

Since Warren Buffett always recommends investors should be “fearful when others are greedy and greedy when others are fearful”, is the index now a screaming buy? I’m torn and here’s why.

FTSE 100: reasons to buy…

First and foremost, the FTSE 100 looks good value on a P/E of 15. This makes the UK’s top tier of companies considerably cheaper relative to other developed markets. 

Despite its recent performance, the FTSE 100 also contains some excellent companies. Life-saving technology firm Halma, credit checker Experian, and property portal Rightmove are just the sort of highly profitable businesses you probably want exposure to in order to grow your wealth. Buying the FTSE 100 via an index tracker or exchange-traded fund will do just that.

While far from a safe haven, buying a fund that tracks the FTSE 100 is also one of the less risky moves you can make. You won’t beat the market but you’ll match its returns (minus some tracking error and costs). You’ll also have saved yourself a lot of the time and energy that active investing demands.

Another positive is that a FTSE 100 tracker fund will generate income, even if a number of the index’s members have withdrawn their dividends for now. The iShares Core FTSE 100 UCITS ETF currently yields just under 4%.

…and reasons to avoid

One counter-argument to buying the FTSE 100 now is that something cheap can keep getting cheaper. With coronavirus infection rates rising sharply, the possibility of another national lockdown is growing every day. Should this happen, it’s hard to imagine markets responding positively. There’s also Brexit to consider.

Second, the performance of the aforementioned great companies in the FTSE 100 will always be offset by the stragglers. For every winner, you’ve got a Roll Royce or Lloyds Bank. This being the case, it’s very unlikely the FTSE 100 will give you anywhere near the sort of returns you can achieve through informed stock picking or a quality-focused fund. Indeed, it will likely be the reinvestment of dividends over time that builds your wealth, not share price growth.

Following on from this, one also needs to consider the opportunity cost of investing in only the UK market. Overvalued it may now be, but those allocating some of their capital to the tech-focused NASDAQ 100 index in the US, for example, would have done far better in 2020 so far. Having a ‘home bias’ can get in the way of wealth generation, even if many FTSE 100 companies generate profits overseas.

Just invest

The direction of markets in the short term depends on a huge range of variables. As such, it’s hard to say whether now is the best time to invest in the FTSE 100. For someone disinclined to thoroughly research stocks, however, I think buying a tracker fund within a diversified Stocks and Shares ISA is unlikely to ever be a bad idea.

That said, those worried about the value of their investments falling in the short term may find it psychologically easier to drip-feed their money rather than go ‘all in’.

As we always say, the most important thing about investing is just to get started. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian, Halma, Lloyds Banking Group, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s how I’d target £496k in FTSE 100 shares and £19k of passive income in a Stocks & Shares ISA

I invest as much surplus cash as I can at the end of the month in my Stocks and Shares…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »