What should we do when FTSE 100 shares crash? We’re surrounded by fallen prices, with some companies genuinely struggling, and others brought down with them. It can be hard trying to work out which ones to buy.
So why not just buy an index tracker and get some of everything? Could that be a good way to profit from a stock market crash? I think it could, and I’ll tell you why.
FTSE 100 shares
From its lowest point of 2020, the FTSE 100 is up close to 50%, at the time of writing. Ignoring fund fees, which are low for index trackers, that means £10k invested at that low point would have grown to nearly £15,000 now.
I think that’s a cracking return in such a short time, and it comes with a bonus. It would have taken no hard work in choosing the shares to buy, or agonising over maybe picking ones set to go bust.
Just buy the market. And sit back.
Timing?
Now this is based on getting the timing perfect, and that’s unlikely. But someone who put money into a FTSE 100 tracker every month from March through to October would still have bagged a cheap average buy price.
And even though we wouldn’t manage a full 50% gain that way, I reckon we’d have a good chance of having hit 25-30%. That’s still a great result for almost no effort.
Prediction
This raises a big question. How could we possibly have predicted these kind of gains while we were sitting in the middle of the worst health crisis in decades?
Well, whatever caused each stock market crash of the past century, they all had one thing in common: they didn’t last long, and the stock market recovered every single time.
I mean, just take a look at the long-term chart and tell me what all the big crashes of the past look like now. That’s right, they’re barely visible ripples in an inexorably rising market.
More to come?
What’s more, I’m seeing signs that we might still be near the start of the recovery.
For one thing, FTSE 100 shares are on an average price-to-earnings (P/E) ratio of about 11. The long-term average is around 14 or 15, and to get back to that could mean a 30% rise, or so.
It looks cheap compared to the US S&P 500 index, which is on a P/E of about twice that. It does raise a risk, mind. A global correction could harm the Footsie, even if it is cheap now.
Earnings and dividends
But there’s another thing. Analysts are forecasting strong earnings growth. And total dividend payouts could be set to reach an all-time record by 2024.
A couple of dozen FTSE 100 companies have launched share buybacks too, so they clearly think their own stocks are cheap.
There’s always risk buying shares, especially in tough economic times. But buying the FTSE 100 through an index tracker restricts it to whole-market risk, and minimises the fallout from any individual stock.
