It has been a rocky year for the flagship FTSE 100 index of leading blue-chip shares – but with some notable highs. Already this week, the index has come close to breaking its all-time record high closing level, set earlier this year.
When stock indexes reach a new high, it does not necessarily mean that they are overvalued. Possibly they could keep pushing upwards for years (or even decades) before the next big crash. But we do know from history that, sooner or later, the market will fall again.
So, as the buoyant FTSE 100 flexes its muscles, here is what I am doing to try and avoid getting burnt if things suddenly move south.
Two vital questions for every investment
I think there are a couple of critical questions smart investors need to consider when making any investment.
The first is: does the business in which they are investing come with excellent long-term commercial prospects? We do not know the future, of course, so we need to make that judgement using current knowledge while thinking seriously about potential risks as well as opportunities ahead.
Secondly, an investor ought to ask themselves whether the price for the investment is an attractive one. A great business does not always make for a brilliant investment, as what you pay matters.
Hunting for bargains in today’s market
The FTSE 100 is made up of Britain’s largest listed companies. That does not mean that they are all great businesses — but dozens of them are in my opinion.
While the index is riding high, different shares within it are not all performing in the same way.
That is both a risk and an opportunity as I see it.
Some shares may be overvalued – perhaps badly overvalued. I am wary of being burnt if I buy them now,only to see their value plummet in future. That helps explain why I always do my research before buying a share.
But the strong performance of the index overall does not mean that there might not be some potential bargains nestling in it this summer.
A FTSE share to consider
As an example, one share I think investors should consider is packaging distributor Bunzl (LSE: BNZL).
This is a perfect example of a share not being the same as the index of which it forms one small part. Over the past year, the FTSE 100 is up 8%. Bunzl, by contrast, is down by 21% in that period.
I had been eyeing the company for a while so used the price fall to buy some shares.
A fall like that does not come from nowhere, of course. Tariff concerns are a risk to Bunzl’s multinational business, but even without them performance had been weakening (revenue slipped slightly last year, while net profit fell 5%). There is a risk that its glory days of growth by acquisition – and with it a heady valuation – are over.
But with a large number of customers who need to order regularly, a time-tested business model and strong trade reputation, I am keeping the faith in this FTSE 100 firm as a long-term investor.
