While the FTSE 100 suggests resilience in the UK stock market, the year-to-date performance of the FTSE 250 says otherwise.
Britain’s leading growth index is down almost 10% since the year kicked off, with smaller companies feeling the pressure of the macroeconomic environment. And with the Bank of England looking like it’s going to maintain higher interest rates for longer, these firms may be set to struggle for some time.
However, even with all this weight on their shoulders, there are plenty of companies with the financial capacity and managerial talent to adapt to the shifting landscape.
I’ve already spotted several businesses that have returned to growth in spite of all the headwinds. And while it may take some time for investors to regain confidence, the best time to buy has almost always been when others are busy selling.
Investing during volatility
As unpleasant as a fluctuating portfolio can be, it’s a very welcome sight for those operating with a long-term time horizon. Why? Because volatility breeds opportunity for investors with the stomach to act.
Emotional decision-making from novice and professional investors alike can send even the best companies into a spiral. And that gives me the chance to snatch up some top-notch firms at lovely discounts.
However, even a terrific price today can get even better. After all, stock market volatility is notoriously difficult to predict. And all too often, I’ve committed to buying shares only to watch them drop a few days later.
One obvious approach to overcome this challenge is to simply time the market. But that’s far easier said than done. In fact, I’d go so far as to say that it’s impossible, with the few that succeed mistaking luck for skill.
Fortunately, there’s an alternative solution – pound cost averaging. Instead of throwing all my spare capital into bargains right away, I can drip-feed it instead.
The downside of this method is that my total transactions increase, boosting my trading costs. However, that’s a price worth paying, in my eyes. After all, if a top-notch stock continues to tumble after my initial investment, I still have some capital at hand to buy more at an even better price.
The importance of diversification
Just because a stock looks like a fantastic opportunity today doesn’t mean it will stay that way. Every firm is at risk of disruption, whether it be an industry-wide cyclical downturn or an interfering start-up stealing market share.
Just look at the history of the UK’s flagship indices. The companies that dominate today are vastly different from when these benchmarks first launched decades ago. And the mix continues to be in a constant state of flux.
This is why diversification plays a crucial role in a long-term investment strategy. By ensuring my portfolio has exposure to a number of sectors, the impact of one industry suffering a downturn is far less severe than if I had all my eggs in one basket.
That’s why my latest buys have been spread across sectors like real estate, technology and finance, to name a few.
