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Another positive is that a FTSE 100 tracker fund will generate income, even if a number of the index’s members have withdrawn their dividends for now.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.
