Why investors should cheer if the FTSE 100 slumps to 5,000 points

With the EU referendum around six weeks away, many investors are becoming rather nervous about the prospects for the FTSE 100. That’s because, if Britain votes to leave the EU, there is a good chance that the FTSE 100 will fall in the short term, simply because of the uncertainty that will exist in a post-EU world for the index.

That’s not to say that leaving the EU would be a bad thing in the long run, but rather that uncertainty usually leads to poor asset price performance in the short-to-medium term.

A superb buying opportunity

While a fall in share prices is never a good thing for those investors who are net sellers, for net buyers it is generally great news — the lower prices allow them to buy more shares for the same money. And with the FTSE 100 having the potential to fall in the short run, the EU referendum could prove to be a superb buying opportunity for long-term investors.

Clearly, buying after a significant fall in the value of the FTSE 100 may go against human psychology. After all, no asset price ever falls without good reason and so if the FTSE 100 were to trade at 5,000 points then its future would seem highly uncertain.

And, as history has shown, most investors will seek safety in numbers and end up following the herd. They will most likely sell rather than buy, and therefore miss out on what could be an excellent long term future for the FTSE 100.

It’s the world economy that matters

Of course, leaving the EU could thrust the British economy into a long and challenging period, in which it will need to renegotiate terms of trade with Europe and the rest of the world. During this period, investment in the UK economy could suffer and drag the FTSE 100 even lower.

However, for most of the companies listed on the FTSE 100 it’s the world economy, rather than the British economy, that really matters. Therefore, if China and the USA in particular can continue to deliver upbeat GDP growth numbers, then earnings for most FTSE 100 constituents could be surprisingly strong.

Due to this, the performance of the FTSE 100 could be impressive whether Britain leaves the EU or not, with the only major difference between the two being the potential for a buying opportunity due to a short term fall in the index’s value.

So, while buying during a downturn is never easy, and it’s certainly impossible to time all transactions perfectly in terms of buying stocks at their “lowest lows”, if the FTSE 100 were to fall to 5,000 points of thereabouts following a vote to leave the EU , then for most investors it would be an opportunity to cheer. That’s because while profits are only realised upon the sale of an asset, it’s the decision of when to buy that has the bigger impact in the lon term.

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Peter Stephens 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.