At around 7,500 points, the FTSE 100 is currently trading below the all-time high achieved in February. Nevertheless, the UK’s flagship index is still higher than 2022 levels, suggesting it completely recovered from last year’s correction. But on closer inspection, that doesn’t seem to be the case.
As a market-cap-weighted index, the largest businesses within the FTSE 100 have the biggest influence over its performance. And with some of the biggest market-cap shares like AstraZeneca dominating the headlines, it’s not surprising to see the index elevated. The majority of other constituents haven’t had the same fortune.
But for prudent investors, there’s still plenty of time to capitalise on bargains created from the 2022 market downturn. With that in mind, here’s how I’d invest £5k today.
Don’t catch a falling knife
During a correction, investors typically end up making rash decisions. And that usually translates into selling shares with downward momentum. This emotionally-driven reaction means that stocks of all shapes and sizes end up getting sold off, even if the underlying business is fundamentally sound.
This volatility breeds opportunity. After all, if fantastic stocks are being hammered into the ground out of fear, then buying them at dirt cheap prices can unlock potentially massive returns in the long run. However, sometimes the fear is justified. And even a rapid downturn in an industry-leading enterprise could be a sign to steer clear.
When looking at the FTSE 100 today, plenty of once-strong businesses may be in for a tough time. With interest rates climbing at a record pace, firms that have become reliant on cheap debt may struggle to achieve growth in the new economic environment. And even if growth continues as expected, the increased cost of servicing loan obligations could adversely affect profit margins.
Investing £5k during a correction
One of the easiest ways to start investing today is to buy shares in an index tracker. And having a position in a low-cost FTSE 100 fund is certainly a valid method to capitalise on the potential upward momentum of the stock market recovery.
However, for those seeking to maximise returns, hand-picking individual companies to invest £5k might be the better option. After all, successfully identifying a depressed stock primed for a comeback can easily lead to double-digit returns, even if they’re a member of an index that’s historically only achieved around 8% per year.
Of course, stock picking comes with its own set of headaches. Risk exposure and volatility are automatically elevated, and it’s up to investors to handle all the investment strategy and portfolio management.
As such, it may not be the most suitable approach for everyone. But in a stock market correction with plenty of top-notch stocks trading at a discount, the risk is well worth the potential reward, in my opinion.
