The FTSE 100’s recent crash could tempt some investors to seek to profit from its short-term price movements. After all, the index and other assets such as forex are currently highly volatile. They could move sharply in either direction over a short time period. As such, the profit potential of short-term trading may be high.
However, the risks involved in such a strategy could be significant. The news flow regarding coronavirus is impossible to predict, and could have a major impact on investor sentiment. Therefore, investors may be better off simply buying and holding FTSE 100 stocks ahead of a potential recovery.
The high volatility currently present in financial markets can mean quick profits for those traders who can accurately predict upcoming price movements. The problem is that anticipating those movements correctly on a consistent basis is highly challenging. Financial markets are highly dependent on news flow regarding coronavirus in the near term, as well as a multitude of other variables. Since it is impossible to know how news will evolve over the coming days, weeks and months, there is a significant risk that you could experience losses.
Buying shares and holding them for the long term sometimes leads to losses. However, those are paper losses that are not realised until an asset is sold. By contrast, products such as spread betting and forex can lead to mounting losses over a short period of time due in part to their use of leverage, and the fact that trades are often short term in nature. As such, buying and holding shares could prove to be a lower-risk means of capitalising on a possible stock market recovery.
Although it is possible to generate high returns from spread betting and forex, a buy-and-hold strategy can also yield impressive total returns. Investing during past bear markets, for example, has enabled investors to profit from the cyclicality of the stock market. With the FTSE 100 having always recovered from its lowest ebbs to report new record highs, buying low and selling high seems to be a consistently successful strategy.
Moreover, it is a far simpler means of generating a profit over the long term. Buying and holding high-quality shares is less labour-intensive than conducting multiple short-term trades. It also saves on commission costs, and does not require the use of leverage. This can make it a much more attractive option from a risk/reward standpoint.
Of course, buying and holding shares may in itself seem to be a risky move right now. Markets could realistically move lower in the near term, and lead to a difficult period for investors. But, through buying companies with solid balance sheets and strong cash flow, you can increase your chances of surviving the market crash and benefitting from its likely recovery.
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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.