When the FTSE 100 and wider stock market crash, many investors are quick to sell out of their investments and hoard cash instead. Depending on different financial situations, this may be a sensible choice. For most though, this decision is simply taken out of fear. This is likely to be fear of the unknown, which some anticipate to be worse than what’s known about today.
But I’m looking to do the opposite, and am holding my current investments instead of selling. Further to this, I’m actually buying stocks within the FTSE 100 at the moment. Before you discredit this idea, here are two reasons I think it’s the right thing to do.
To quote half of a phrase from the legendary investor, “be greedy when others are fearful”. The contrarian view is that when people are panic-selling, they look beyond the longer-term fair value of any stock. This can present great FTSE 100 buying opportunities for investors who are greedy at this time.
I personally am not a huge fan of being called ‘greedy’, but I agree with the concept completely. Take the example of HSBC. One of the largest banks in the world has seen its share price fall by 33.5% this year. The price at Friday’s close was almost the same as the lows seen during the 2008/09 banking crisis!
Do I think that HSBC is in the same position as during the global financial crisis? Not at all. I don’t have enough space to write detailed reasonings why, but it looks very attractive to buy at current levels. I understand that dividends have been suspended, and the workforce is due to be cut heavily. But this long-term transformation strategy plays into the hands of those who are ‘greedy’ long-term buyers over short term panic-sellers.
The other powerful argument for buying FTSE 100 stocks now is one I made to a friend yesterday. He was complaining about the low Cash ISA rates available at the moment. While he has some investments in bonds, these too have only given 1%-3% gains recently.
So when we measure up the risk/reward of allocating funds to the stock market, it looks one of the best options at the moment. Using our earlier example, the risk for investors of buying a bank like HSBC is that it goes bust. I find this very unlikely, so my risk is limited. The reward side is much larger, even getting back to the 2020 highs returns me over 30%.
So when I compare this to the low Cash ISA rates of almost no risk but only a roughly 1% reward, it make me want to move money into stocks. This may not be as powerful for you, as your risk profile may differ to mine, but I think this is valid for many investors.
However the rest of this year plays out, I think that in the longer term, it will be looked back on as a slump that was worth buying. So I will take Mr Buffet’s advice (and my own) and keep buying FTSE 100 stocks at the moment.
Don’t miss our special stock presentation.
It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.
They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.
That’s why they’re referring to it as the FTSE’s ‘double agent’.
Because they believe it’s working both with the market… And against it.
To find out why we think you should add it to your portfolio today…
Jonathan Smith does not own shares in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. 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.