In recent months the FTSE 100 has experienced a challenging period. The index has fallen by as much as 10%, which is halfway towards being a bear market. Even though it may stabilise to some degree in the near term, the threats to its medium-term outlook remain in place.
The prospect of a trade war could weigh on investors’ minds over the coming months, while the potential for higher US interest rates could also cause further volatility.
During such periods, life as an investor can be tough. It is easy to succumb to the fear which possesses all investors during such times, and selling stocks ahead of what could be a difficult period for the world economy may seem to be logical. However, through buying shares during volatile periods, it may be possible to generate higher returns in the long run.
Of course, volatility is nothing new when it comes to the stock market. There have been, and always will be, times when share prices struggle for clear direction and could realistically move 20% higher or lower over a matter of months.
At the present time, the risk of a full-scale trade war is very real. There have already been a number of tariffs placed on imports by the US, China and other countries around the world. Should there be any further tariffs, this could hurt investor sentiment. At the same time, though, world leaders may decide against this path, and this could cause a rise in the FTSE 100.
Similarly, the prospect of a higher US interest rate may hurt investor confidence to some degree. The strength of the US economy has been exceptionally high in 2018, and this could lead to a more hawkish stance from the Federal Reserve. Alongside uncertainty surrounding Brexit, this could cause significant upwards or downwards movements to the index over the coming months.
It is always easy to look back upon periods of difficulty and volatility for the stock market and state that it proved to be a good buying opportunity. Obvious examples are the financial crisis and the aftermath of the dotcom crisis. Buying shares during volatile periods, though, is tough and requires a long-term focus from investors. That’s because there is a realistic chance of paper losses in the short run, which could cause worry and even fear to rise.
However, by focusing on high-quality shares which have strong balance sheets, good track records of growth, low valuations and improving cash flow, it may be possible to capitalise on volatile periods for share prices. Although this strategy may not be easy to implement due to the worry it can cause from buying shares at an uncertain time, it can tip the risk/reward ratio further in an investor’s favour through obtaining a margin of safety. And since the FTSE 100 yields over 4% at the present time, it still appears to offer good value for money for the long term.
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Peter Stephens 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.