Investors sometimes feel panic-stricken when the stock market corrects, but often the best time to buy is when shares go lower because you get more for your money, which means there’s more to compound in the years that follow.
I made one of my biggest investing mistakes at the beginning of the century by halting payments into my pension when the markets crashed in the wake of the tech-wreck. Had I kept paying in, the bargain investments I’d have made would have grown and compounded to many thousands of pounds by today. Please don’t make the same error yourself by shying away from the stock market at the very time it becomes the most attractive.
Investing in big business
I’m long-term bullish on the FTSE 100 (INDEXFTSE: UKX) and see it as an excellent investment vehicle for a £50-a-month investment. Buying the dips strikes me as a powerful strategy, and a monthly investment will deliver all the benefits of pound/cost averaging. So, ‘right now’ – when markets are weak– is an excellent time to start your £50-a-month investment programme, and I’d invest in a FTSE 100 tracker fund.
The FTSE 100 companies represent around 80% of the entire market capitalisation of the London Stock Exchange, so if you invest in a fund that tracks the index you will be exposed to a large part of the fortunes of Britain’s public companies. However, in the FTSE indices, share prices are weighted by market capitalisation, which means that the larger companies make more of a difference to the index than smaller companies. That situation leads to a benefit that you can exploit right now as the market remains volatile. Let me explain…
A winning tactic
Many of the largest firms in the FTSE 100 come from industries that are considered to be cyclical, meaning that they are sensitive to the ups and downs of macroeconomic and industry-specific circumstances. The index is therefore heavily weighted to cyclical firms operating in areas such as the financial sector, miners, oil & gas companies, retailers, housebuilders, construction and outsourcing enterprises. At the slightest sign of macroeconomic wobbles, the share prices of cyclical firms tend to react, so we get big swings as cyclical stocks adjust to economic news or predictions. Because the FTSE 100 index has a high content of cyclical firms we tend to see big swings in that too.
Yet cyclical stocks often perform handbrake turns and shoot back up again. If you look at a long-term chart of the FTSE 100 you’ll see that effect. Historically, it has always been a great idea to buy the troughs of the index. However, if you do buy on weakness in the Footsie – such as right now – you’ll be on the right side of a much bigger trade. The index began on 3 January 1984 at the base level of 1,000. Even at today’s level around 7,200 that’s a return of 620% over 34 years. If you’d invested in a FTSE 100 tracking fund over that period and reinvested the dividends you’d collect along the way, your return would have been much larger than that. You can automatically reinvest your dividends with a tracker fund if you select an accumulation version, which reinvests dividends for you. The alternative is an income version, which pays you the cash.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.