I’m forgetting bonds and searching for bargain FTSE 100 shares to buy

Bonds might be good option to diversify my portfolio, but I think there are a number of excellent FTSE 100 shares to buy right now instead.

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.

I’ve been screening for FTSE 100 shares to buy. Stock markets can be volatile of course. But looking through the FTSE 100 shows that nearly half of the shares are down by double-digits so far in 2022. This says to me there could be some bargains on offer.

Buying bonds can be a good option too. For one, they’re typically less volatile than stocks. And they can form a key part of a diversified portfolio. But today the interest rates on offer are quite low. A 10-year UK government bond only yields 1.98% right now.

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There could be higher returns for me on offer elsewhere. Let’s take a closer look.

The FTSE 100 today

I think I can earn a higher return investing in the FTSE 100. I do need to take on higher risk though. Indeed, just looking at how much some share prices have fallen shows me that I could lose the money that I put in.

Investors have had to deal with a multitude of macroeconomic risks this year. From rising inflation, the awful events in Eastern Europe, and Covid lockdowns in China that may disrupt supply chains even more. These risks can lead to depressed share prices, which in turn lowers company valuations.

However, lower share prices can throw up some bargain investments. And over enough time, the stock market does generally rise – just not in a straight line!

One strategy I’d consider is simply investing in the FTSE 100 using an exchange traded fund (ETF). I’ve used the iShares FTSE 100 ETF (LSE: ISF) before, which means I’d have a small exposure to every company in the index. The dividend yield is a respectable 3.5% today, so higher than the yield on a 10-year UK government bond.

But my preferred investing strategy is buying good-quality companies. If the valuations have become cheaper, and the companies themselves aren’t affected, I could find a bargain.

Buy-and-hold

Risks aside, there’s good potential for gains in the stock market taking a long term buy-and-hold approach. I look for quality companies that have high profit margins, with attractive returns on capital. Over time, I’d view these investments as giving me the best chance of generating significant returns.

I’d focus my research on companies such as Halma, Rightmove and Ashtead Group. All three have depressed share prices this year but achieve double-digit profit margins and returns on capital.

There are some mighty dividend-yielding stocks in the FTSE 100 too. Persimmon and Rio Tinto have double-digit yield forecasts right now. They operate in different sectors, so if I bought the shares, I’d be more diversified.

Companies such as ITV and Royal Mail also look dirt-cheap on a price-to-earnings basis, so I would look at recent company accounts to see if there are bargain investments here.

Investing is all about a balance of risk and reward. And then, most crucially, whether each investment is suitable for my risk profile. But as history shows, the stock market does generally rise over time. For me, these potential investments are worth further research and could very well be bargain shares to buy today.

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Dan Appleby owns shares of Rightmove, ITV and Rio Tinto. The Motley Fool UK has recommended Halma, ITV, 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.

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 considered, so you should consider taking independent financial advice.

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