Many FTSE 100 stocks are back on an upward trajectory as inflation continues to steadily tumble. Growth-oriented companies, in particular, have enjoyed a significant comeback, with the likes of AstraZeneca and Next rising by double digits.
As economic activity slowly ramps back up, businesses are better able to grow. And it doesn’t take long for investors to realise bargain buying opportunities have emerged. After all, growth stocks were some of the hardest hit by last year’s correction. And those that were oversold likely have the greatest potential for a stellar comeback.
With that in mind, here’s how I’d go about investing £1,000 in the UK’s flagship index today for the long run.
Don’t rush into bad decisions
With many stocks back on the rise, it may be tempting to start buying as quickly as possible. After all, no one wants to miss out on potentially explosive recovery returns. However, while investing as soon as possible is generally good advice to get the compounding process started, rushing to buy companies before proper analysis can backfire spectacularly.
The FTSE 100 may have a perfect track record of recovering from even the direst of economic downturns. But that doesn’t mean every one of its constituents is destined to return to glory. In fact, some may be unable to adapt to higher interest rates due to their capital-intensive strategies that can’t be easily left behind.
Therefore, before putting any of my £1,000 to work, I need to spend time carefully evaluating my options. Starting with the stocks that have performed the worst of late is often the best place to find a hidden gem, in my experience. However, in many cases, investors may have been justified in selling them off. And it’s critical to understand why to make an informed decision.
Diversification is paramount
Much like a downward correction, recoveries can be volatile periods. Both in terms of stock price movements and business operations. My £1,000 isn’t enough to build a diversified portfolio of individual stocks. However, it may serve as an opportunity to further diversify an existing portfolio.
Volatility can breed opportunity. But even if a terrific company ends up in the gutter, it may still evolve into a bad investment. Businesses need time to undo the damage from the macroeconomic environment. And for some firms, this process could take years. Needless to say, that’s a big window for something else to go wrong.
By having a diversified portfolio of top-notch stocks, the impact of a single position failing to live up to expectations can be significantly mitigated. And it doesn’t have to just be growth stocks. Dividend-paying firms have equally been thrown out of the window over the last year. And subsequently, there are many interesting high-yield opportunities for investors to capitalise on.
