2018 has been a rough year for investors everywhere, and the FTSE 100 has not been immune. At the time of writing, it stands at 6,882, down more than 10% year-to-date. October was tough and December has been brutal, at times, even if the index is currently staging a recovery, up 1.57% this morning.
So where does the index go next? I’ve no idea. Nobody can consistently predict future stock market movements. If they could, they’d be trillionaires. But one thing we can say with some confidence is that volatility is back, and with a vengeance. If that sounds scary, it doesn’t need to be, providing you’re investing for the long term. In that case, you can afford to overlook dramatic short-term swings in share prices, because you are looking far, far ahead of them.
What volatility does offer you is a buying opportunity. You could select a low-cost tracker such as the iShares FTSE 100 ETF, or HSBC FTSE 100 Index, then top it up whenever share prices dip. That way, you’re picking up stock at reduced prices and will benefit when the long-term recovery finally comes.
Ups and downs
There’s no guarantee when that recovery will come, of course. The tracker could have further to fall. If that happens, then you should invest a little more at the new lower price, if you have a bit of money to spare. Too many investors prefer to buy when investor sentiment and share prices are high, but you need to do the opposite. Shun the herd by pumping money into your fund when spirits are low and share prices are cheaper. Then hold on for the future.
The next thing you must do is reinvest your dividends straight back into your fund. Next year, the FTSE 100 is forecast to yield a massive 4.9%, due to generous company payouts. That’s an all-time record high, and you can claim a piece of the action with your tracker. By reinvesting those dividends, you buy up more units in your fund, turbocharging its growth.
This way you actually benefit if markets drop, because your reinvested dividends will pick up more stock, which will be worth more when markets recover. This is one of the hidden glories of investing, as your wealth compounds over time.
So what has this got to do with the State Pension? You probably don’t need me to tell you it only offers the most basic of incomes, around £8,500 a year. To enjoy a comfortable retirement, you need to invest under your own steam over the decades. This means stocks and shares, rather than a savings account or cash ISA, where you will be lucky to get 1.5% a year.
Today’s volatility gives you an opportunity to build up a position in the FTSE 100, or individual company stocks if you prefer that. Markets look risky right now but drip-feeding money in, either lump sums when markets dip, or a regular monthly direct payment, can turn this to your advantage and help free you from State Pension misery.
harveyj holds the iShares FTSE 100 and HSBC FTSE 100 Index but has no position in any other share 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.