Buying FTSE 100 shares is always a bit scary but particularly in turbulent times like these. Nobody wants to buy a company only to see its value plunge the next day in a stock market crash.
This year has been particularly volatile, due to war in Ukraine, post-pandemic supply shortages, ongoing Covid lockdowns in China, the energy shock, and widespread political turmoil. Investors have to be brave to exchange their cash for FTSE 100 shares.
Although maybe not that brave. The FTSE 100 has performed relatively well this year. It is down just 6.19% year-to-date while the US S&P 500 has fallen 19.54%.
Second-guessing the FTSE 100
London’s blue-chip index has held up relatively well because it is packed full of solid, undervalued dividend stocks. Investors are wary of buying overvalued stocks as sentiment turns negative, as they are more vulnerable in a crash. They also value dividends more than they did, as a regular stream of shareholder payouts can help offset some of the damage inflation is doing to their wealth.
Just because stock markets have crashed does not mean they can’t fall even further. So what do I think will happen next?
The honest, boring, and disappointing answer is that I have absolutely no idea. If I pretended otherwise, it will be a liar or a fraud. Or both.
There are simply too many variables for anyone to second-guess market movements with consistent accuracy (and no supercomputer will ever do it, either). Of course, everyone is entitled to their opinion, but that’s all it is. An opinion. It means nothing.
In case you feel let down, I’ll tell you what I do know. The FTSE 100 has fallen this year. Therefore stocks listed on the index are cheaper than they were. This presents me with a buying opportunity, but also poses a threat.
Before buying a bargain stock, I would like to know why its share price has gone south. Sometimes the reason will be beyond its control. For example, a housebuilder is likely to have fallen sharply this year, as investors assume rising mortgage rates and input costs will hit demand.
I’m not even thinking about a stock market crash
Yet every stock in the housebuilding sector will not have fallen at exactly the same speed. A company with a worryingly high level net debt is likely to have fallen faster than a rival with a tiptop balance sheet. Similarly, one with a strong order book or well-covered dividend will perform better than one without these things.
Those operating in areas of the country where demand is likely to remain relatively solid are also likely to have an edge. I will take factors like these into consideration when buying any stock. They can help me separate the wheat from the chaff.
I’m not going to spend time working out where the market is likely to rise or fall. Instead, I will devote my energies to looking at individual stocks, and seeing whether their numbers add up. There’s still an element of speculation involved and they could fall next day if stock markets do crash, but I reckon this lifts the odds in my favour.