The FTSE 250 has been on quite a rollercoaster ride of late. While the index is relatively flat year-to-date, it’s been quite the seesaw, moving up and down over the last eight months.
The FTSE 100 has been experiencing a similar, albeit more muted, trend, providing a better refuge for investors from volatility.
But now that inflation is cooling and interest rate hikes are likely nearing an end, businesses have started to adapt. And for the younger enterprises within the FTSE 250, we might be near the start of a long-awaited upward correction.
Clarity breeds confidence
When looking through the growth index at the losers in 2023, many of them have actually been performing admirably. In fact, a handful have actually hit record profits despite what the downward trajectory of the stock price might suggest.
While it might be tempting to assume that most investors are being dumb, these patterns aren’t entirely unjustified. It’s important to remember that the stock market is a forward-thinking machine.
This is how stocks often recover faster than the underlying businesses and vice versa. And it’s why uncertainty can trigger enormous downward volatility.
Investors often assume the worst if they don’t know what to expect. And it takes far longer to restore confidence than to destroy it. Therefore, providing that economic conditions continue improving, confidence will likely also steadily rise.
Once the danger appears to be over, an upward correction could be on the horizon. In other words, investors may be looking at the perfect time to buy low and eventually sell high – the ultimate recipe for building wealth in the stock market.
Moreover, market downturns like the one seen last year are pretty rare. So it could be years before another buying opportunity like this emerges. After all, it took roughly 15 years for the stock market to take a beating similar to what was seen in 2008.
Taking a step back
While top-notch FTSE 250 stocks may look like bargains today, this is based on the assumption that the worst is over. And that’s not necessarily guaranteed.
Institutional forecasts currently anticipate the UK to narrowly avoid a recession. But forecasts, by their very nature, have an element of uncertainty. And should the Bank of England be too aggressive with its monetary policy, it may tip the economy over the edge.
All of this is to say we may not be out of the woods yet. And cheap-looking shares today may become even cheaper in a few weeks or months. Fortunately, a relatively simple solution to mitigate this risk is pound cost averaging.
Instead of throwing all their capital into the market in one go, investors can spread their buying activity over several weeks. Although this does result in higher transaction fees from brokers, it might be a price worth paying if a terrific company falls further.
After all, that means investors still have capital to buy more at an even better price.
