At just under 8,000 points, the FTSE 100 is up more than 16% since October! This recent growth spurt has even pushed the index to a new record high last month, suggesting investor confidence is returning to the stock market.
In fairness, this rally appears to be driven by only a handful of companies like AstraZeneca. However, that may suggest the window of opportunity to capitalise on the eventual stock market recovery remains open. After all, plenty of top-notch FTSE 100 shares have yet to recover from the 2022 correction.
Not all stocks deserve to suffer
There’s no denying that rapid inflation and interest hikes are harming many businesses, including the big ones. With household budgets getting tighter, consumer spending isn’t exactly going in the right direction, making growth far more challenging.
For shareholders, that translates into lacklustre performance and, in some cases, missed earnings targets. With uncertainty still reigning supreme, many investors are pulling their money out, perhaps even at a loss, to try and protect their wealth.
But this emotionally-driven decision is likely a trap for long-term investors. While unpleasant, macroeconomic conditions come and go. And there are plenty of businesses in the FTSE 100 index that have gone through very similar circumstances in the past.
With most mindsets focused on temporary short-term volatility, many excellent stocks have been caught in the panic-selling crossfire. And that’s created buying opportunities for patient investors, even after the latest stock market rally.
Investing in a potential bull market
It’s important to remember that macroeconomic conditions continue to persist and plague businesses. As such, the stock market’s latest round of growth may face another down period. In fact, seeing a small rally before another plunge is a common trend during bear markets.
But this doesn’t happen every time. And the FTSE 100’s 2023 rebound may actually be the start of a new bull market. So how can an investor with £10k saved up in an ISA capitalise on this potential growth while keeping risk in check?
Portfolio risk management can get complicated, especially when using financial derivatives such as stock options. Fortunately, novice investors can easily deploy two very simple strategies: Diversification and ‘pound cost averaging’.
Instead of investing £10k into a single business, investors can spread their capital across multiple firms operating in different industries and geographies. That way, should a particular sector or economy face a downturn, the impact on an investment portfolio can be mitigated by other positions unaffected by these problems.
As for pound cost averaging, this buying strategy helps mitigate the impact of potential looming downturns in the stock market. Instead of investing £10k in one go, the capital is drip-fed into positions over time. Obviously, that’s going to drive up trading fees. So what’s the point?
Suppose the FTSE 100 does end up plunging again, as some bearish investors are currently predicting? In that case, having residual capital at hand will enable an investor to buy more shares in top-notch enterprises at even better prices. This reduces the average cost, mitigating the short-term impact of volatility while capitalising on the long-term stock market recovery.
