Last week saw the flagship index of leading UK shares, the FTSE 100, hit a record high. But does an all-time high make it a good or bad time for a stock market beginner to start investing?
To answer that question, it is important to understand the wider context.
What an index is – and isn’t
An index contains some shares – in the case of the FTSE 100, it is the 100 London-listed shares with the biggest market capitalisation (and that also meet certain other requirements).
That means it represents a slice of the market (albeit a significant one in the case of the FTSE 100) not the whole thing.
This can be seen by comparing the contrasting performances of the FTSE 100 (up 13% over the past five years) with that of the FTSE 250 index for smaller capitalisation companies (down 5% in the same period).
On top of that, as companies with growing capitalisations move into the top index and members that shrink enough get relegated to the FTSE 250, there is an inbuilt bias.
That can mean the FTSE 100 hitting a record high does not necessarily mean that the 100 companies that were in it five years ago have performed as well on average as the currently composed index.
Why I buy individual shares
It may seem a bit confusing. But making money in the stock market is serious stuff!
You may have spotted another potential concern for those who invest in the FTSE 100. While the index can do well, some individual shares could be complete dogs and then – deservedly – get booted down to the FTSE 250.
But if an investor simply bought the better shares, not the dogs, he could likely outperform the FTSE 100 — by a significant margin.
I like buying individual shares not the index as I think it gives me a chance of outperforming said index. That is not an easy goal though.
That brings me back to the original question, whether now is a good time for a stock market novice to start buying shares.
The answer is – it depends. But on what?
For someone to start investing now (or at any time), what determines their likely success or failure is not what the FTSE 100 does. It is what shares they choose to buy and how much they pay for them.
Hunting for bargains even while the FTSE rides high
So even though the FTSE 100 has been on top form, I think some of the shares in it could be potential bargains for an investor to consider buying.
An example worth further research is M&G (LSE: MNG). The FTSE 100 asset manager is a well-known name with millions of customers. I see that as a strength, as it helps to set it apart from rivals.
The firm operates in a market that has high demand. I think it is likely to stay that way over the long run.
One risk I perceive, as an M&G shareholder myself, is that the company saw clients pull more funds out than they put in in the first half of last year. If that trend continues, profits could be hurt.
For now though, M&G remains around 15% below its 12-month high – and yields 9.7%.
