Why RBS IS Wrong To Recommend Selling The FTSE 100

RBS is reported to have advised clients to sell everything but high quality bonds as it adopts a relatively cautious stance regarding the prospects for the FTSE 100. Clearly, the performance of the index has been extremely disappointing since the turn of the year, with it having fallen by 4.8% already in 2016.

The reasons for this are clear. A slowing China plus lower commodity prices (both of which are being impacted by an appreciating dollar) have left many investors feeling downbeat regarding the prospects for the FTSE 100 and also for the global economy. As such, there’s a chance of an economic slowdown in the near term and the FTSE 100 could realistically continue its recent woes over the coming months.

Therefore, short-term investors may wish to sell up and walk away, but for long-term investors the decision may be a very different one. That’s because, with the FTSE 100 having a yield of over 4% and a price-to-earnings (P/E) ratio of less than 13, it appears to offer good value for money at the present time. Moreover, it appears to price-in the risk of slowing global economic growth, thereby providing a margin of safety for long-term investors.

Don’t worry, be happy

Certainly, its price level could move lower, but there’s always a chance of significant share price falls and there are always risks to global growth. And as former US President Calvin Coolidge once stated: “If you see 10 troubles coming down the road, you can be sure that nine will run into the ditch before they hit you.” In other words, it’s always possible to find reasons to be nervous, to worry and to sell your investments, but the reality is that stock markets have always recovered.

That’s why for the long term, value investing has been a successful strategy. It doesn’t seek to find the bottom of the market’s price level, nor to find the top. It merely focuses on fundamentals and whether a risk/reward ratio is appealing or not. And with the US economy performing relatively well, the European economy likely to benefit from a quantitative easing programme and China transitioning to a consumer-led economy, the long-term growth prospects for the world remain relatively bright.

Certainly, there will always be volatility and there will always be (at least) 10 potential problems coming down the road at any given time. However, the key takeaway is that the FTSE 100 is relatively cheap at the present time. While we’re most certainly in uncharted territory regarding US interest rate rises and the changes occurring in China, change can provide opportunity for investors with cool heads who can stomach fluctuations in the values of their portfolios in the short run.

Selling up may cause lower losses in the coming weeks and months, but no worthwhile returns have ever been made without taking risks. While 2016 may prove to be another challenging year for stock markets including the FTSE 100, it may also be an opportunity to buy a range of high quality companies for the long haul, rather than simply giving up and accepting perennially disappointing returns from cash or high quality bonds.

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The five companies in question offer stunning dividend yields, have fantastic long-term potential, and trade at very appealing valuations. As such, they could deliver excellent returns and provide your portfolio with a major boost in 2016 and beyond.

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Peter Stephens owns shares in RBS. 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.