It has been quite a year so far for the flagship FTSE 100 index. This week, the basket of blue-chip firms once more hit an all-time high. It passed the 8,000 mark for the first time.
With markets hitting new heights even while the economic backdrop remains sluggish at best, is it a sign I ought to sell some of my shares in anticipation of a pullback?
Taking a long-term investment approach
My approach to the stock market is based on my belief in long-term investing.
As an investor, over time, there will typically be boom times – and bad times too. Making decisions on the fly in the heat of the moment can lead to costly errors or regrets. That is why I have an investment philosophy I use when considering specific questions, like what to do now the FTSE 100 is in new territory.
So a couple of its elements inform my response to this week’s developments.
Perils of market timing
Trying to decide what will happen next to a stock index can take a lot of time and effort. At best though, it just ends up as an educated guess.
Nobody actually knows what will happen to the FTSE 100 next week, let alone in the months and years to come.
Looking at one data point – in this case the FTSE 100 level – and using it to try and predict what comes next is a form of market timing. The thinking behind such an approach is that I could sell now, wait for the market to crash, then buy the same shares I owned before at a cheaper price.
In theory, I might be able to do that. In practice, trying to time the market can be a costly fool’s errand. Lots of very smart people are constantly trying to figure out where the market will go next. They cannot do it with any certainty — and neither can I.
A market of stocks
Another consideration for me with the leading share index in new territory is that, in a way, it does not matter to me. I own some FTSE 100 shares such as M&G and JD Sports but I do not actually own the index overall. As the saying goes, it is a market of stocks, not a stock market.
In other words, when the FTSE 100 looks cheap, some shares in it may still be overvalued. Conversely, even though it looks high, that does not mean individual shares in it are necessarily expensive. Both M&G and JD Sports are below their all-time highs, for example.
My approach to a soaring FTSE 100
Taken together, those two elements of my investment strategy can be summarised in a single idea.
I am trying to buy shares in outstanding businesses that trade at an attractive price. That has everything to do with my analysis of each individual company’s business and its valuation. It has nothing to do with what is happening to the FTSE 100 index!
