The FTSE 100 index has been moving up all week and further upwards progress today, as I write, encourages me that we could be near the bottom of the correction that developed during October.
Really though, I’ve no idea what will happen next, of course. Maybe the FTSE 100 will reverse direction and undercut its October low. If you look at a chart for America’s Dow Jones Industrial Average, the pattern is almost identical to that of the FTSE 100 over the past month or so, which lends weight to the theory that wherever the US market goes, the London market will follow. I think that is certainly true of the big plunges, at least!
Successful US trader Mark Minervini tweeted this yesterday: “We are not out of the woods. You don’t repair a market correction in a day or two. To establish a reliable bottom, you need backing & filling and a period of consolidation… that’s IF the low has been made. Prepare for more volatility soon.”
I like to take notice of Minervini because he has a truly remarkable record of making accurate market calls. However, none of this matters a jot to what I would do next. Whether the market rises or falls, I think the best course of action for me is to buy more shares and share-based investments.
Many individual share names are well off their highs at the moment, which means if the underlying quality of the business remains intact and the outlook for trading is okay, you’ll be getting better value than you would before the falls if you buy the shares now. But I think one of the most powerful approaches to investing is to add your money in stages. That way, you will get more for your money when share prices are down and you will not be investing all your funds in one go when the shares go up again.
Ironing out the bumps
That technique is known as pound/cost averaging, although Minervini would probably call it dollar/cost averaging. If you have a lump sum to invest, say £10,000, you could invest in stages of £2,000, for example, perhaps evenly spread over a year. That way you could end up ironing out some of the volatility that Minervini expects. However, I think pound/cost averaging works best of all when applied to regular monthly payments over a very long period of time. I also think it works best if you select a collective investment vehicle that removes single-company risk, such as a low-cost, passive FTSE 100 index tracker fund.
I can’t think of a better time to start investing, say, for retirement in an FTSE 100 tracker than ‘right now’. With a market correction in full swing and volatility back on the table, conditions are perfect for using pound/cost averaging to start the compounding process to build up your retirement savings. One attractive option is to open a stocks and shares ISA and contribute monthly payments into a FTSE 100 tracker fund held within the ISA. If you choose a tracker fund that automatically reinvests dividends, your investment will grow over time and pound/cost averaging will smooth the ups and downs of the index.
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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.