Now may look like a bad time to buy FTSE 100 shares, but I beg to differ. Today’s turmoil offers a brilliant buying opportunity, but with three provisos.
At The Motley Fool, we never like to waste a stock market crash. Or even a dip, like the one the FTSE 100 is suffering at the moment.
The index of top UK shares has been relatively resilient in 2022. It is down 8.09% year-to-date while the US S&P 500 has crashed 23.49%. Yet the FTSE 100’s relatively smaller drop is still throwing up lots of share buying opportunities for me.
FTSE 100 offers me great value
When an individual stock falls sharply in value, I tread carefully. Usually that’s due to a bad piece of company news, such as a profit warning, reduced dividend, or some other nasty that weighs on its prospects.
When the whole FTSE 100 falls, it’s a different matter, as good companies are sold off with the bad. Investors are fleeing risk right now, as today’s problems aren’t going away soon. Post-Covid supply shortages, war in Ukraine, and (crucially) rising interest rates are combining to destroy investor sentiment.
These problems will hit some sectors harder than others. Housebuilders such as Barratt Developments will suffer as rising mortgage rates hit demand. So will asset managers such as Schroders, as markets go haywire. Supermarkets like Sainsbury’s are also suffering, as customers buy less or trade down.
By contrast, luxury goods maker Burberry Group is on safer ground as the wealthy are less affected by the cost-of-living crisis. So is spirits maker Diageo, as its customers need a stiff drink right now.
I’m focusing my attention on companies that have been hit hardest, as their share prices have fallen most. They offer a tempting combo of dirt-cheap valuations and astonishing yields. I’ve just taken a punt on housebuilder Persimmon. I’m worried I may regret this, but found its 19.49% yield and valuation of just 4.81 times earnings too ridiculous to resist.
I’m now caught between buying Tesco for long-term income and growth, or investing in Rolls-Royce shares in the hope they will lead the charge when markets recover.
Three ways I reduce risk
The big risk is that markets could fall further from here, but I’m happy to take that chance for three reasons. First, it’s impossible to buy right at the bottom of the market. Today’s lower prices are good enough for me.
Second, I’m building a balanced portfolio of FTSE 100 stocks on top of that, to turbo-charge my growth. I aim to hold at least a dozen, so if one or two fail to deliver, hopefully the others should more than compensate.
Finally, and most important, I’m only buying shares that I plan to hold for the long term. That means at least 20 years, which should give plenty of time for the FTSE 100 to rebound from its current troubles.
Sometimes I have to steel myself to click the ‘buy’ button but if I wait until after the FTSE 100 has recovered, then the same stocks should cost a lot more than they do today.