Why I’ve Bought The FTSE 100 On Its 12-Month Low

stock exchangeWe can’t say we weren’t warned. Analysts have been shouting about the forthcoming stock market correction for months, and now it seems to be upon us.

The FTSE 100 has now fallen 8% from its 52-week high of 6878 to around 6350 at time of writing, and the consensus is the sell-off has further to run.

So why did I just throw money into a low-cost FTSE 100 tracker?

Bear With Me

I’m not feeling bullish, quite the reverse. I’ve expected the accumulated weight of the China slowdown, Ukraine crisis, eurozone policy errors and Middle East nightmare to wreak serious damage for some time.

It was clear that global markets were being supported by a single prop, the easy money policies of the US Federal Reserve. Once they were removed, the roof would fall in.

Now the hawks are chipping away at the supports.

Investors are also worried about signs of a slowdown in the global economy, with August’s surprise 3.9% drop in UK construction just the latest figure to disappoint.

Markets were paying far more attention to Germany, Europe’s supposed powerhouse, which is tipping ever closer to self-inflicted deflation.

Commodity prices have plunged, led by oil, now trading at below $90 a barrel. That’s down from $116 in July.

As sentiment darkens, further FTSE 100 falls are likely.

Anybody who buys on the current dip is certainly taking a chance. Traders fear this is more than a short-term setback, and could turn into a full-blown crash. A lot will depend on how the mood swings over the weekend.

Either way, next week will be interesting.

The Highs And Lows

So why did I throw real money into this market, given the dangers? First, the FTSE 100 has dipped to around today’s level five times in the last 12 months, only to quickly bounce back.

I failed to take sufficient advantage of those buying opportunities, now I want to make amends.

Also, I didn’t throw all my money in. I only parted with a small proportion of the war chest I have sat on for the last nervy year. I have more in reserve if the mood darkens further.

If markets succumb to Ebola media hype, Isis presses closer to the Turkish border, China and Germany struggle, or US central bankers let slip a hawkish remark, the FTSE 100 could plunge below 6000.

If it does, I will buy more at the new, lower price.

But if central bankers step into calm nerves, it will be a different story. The slightest hint that the Fed may postpone the first interest rate hike would stiffen morale.

With falling commodity prices threatening a deflationary shock, it has a strong incentive to act.

Good News Bad

Amid all the worry this week, it is easy to overlook the good news. The sharp plunge in the oil price could is putting money into the pockets of businesses and consumers.

FTSE 100 companies are sitting on a net cash mountain of £53.3bn, up from £37.9bn last year, according to Capita.

The index looks reasonably priced, trading at just under 13 times earnings and yielding more than 3.6%. Those are the numbers I have bought into today.

Finally, I can afford to take this chance because I’m investing for the long term. When markets recover — and they will, given time — buying the FTSE at 6350 will look a smarter move than it seems today.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.