I believe the recent coronavirus crash may be an important investing opportunity, especially for long-term holders of shares. History tells us that eventually economic slumps end and robust shares go on to make new highs.
And most seasoned investors know that despite various downturns and even crashes, broader markets offer higher returns on average than many other investments over the long run — usually around 6% to 8% annually.
However, young or new investors may become nervous as they see stocks plummet. They may decide not to invest and thus potentially miss the rallies when solid shares come back. Therefore today I’d like to discuss how new investors may start investing in the stock market.
Time and compound interest
For many people, investing in shares may initially sound confusing. They may also think that they do not earn enough money to buy stocks. But even if you only have about a few pounds to spare every week, you can invest, and your money could grow with compound interest over time to a surprisingly large amount.
Let’s assume that you are now 40 years old with £15,000 in savings and that you plan to retire at age 65.
You decide to invest that £15,000 in a fund now and make an additional £6,000 of contributions annually at the start of the year. You have 25 years to invest. The annual return is 6%, compounded once a year. At the end of 25 years, the total amount saved becomes £413,316.
Saving £6,000 a year would mean being able to put aside around £500 a month or about £17 a day. Might you just be wondering if you should skip that next impulse purchase?
The coronavirus crash may mean opportunity
The most famous index in the UK is the FTSE 100 which began in 1984. Most companies in the index are multinational conglomerates. The 100 components of the index are reviewed quarterly.
The FTSE 250 index consists of the 101st to the 350th largest companies listed on the LSE. It was launched in 1992. Companies in it usually have a more domestic focus.
Over the past several weeks, we have witnessed a coronavirus crash worldwide. Year-to-date, the FTSE 100 and FTSE 250 are down about 25% and 27% respectively. These declines mean they are now in bear market territory.
I must highlight that these decreases in index levels do not include the regular dividend payments made to shareholders. In 2019, average dividend yields for the FTSE 100 and the FTSE 250 were about 4.5% and 2.8% respectively.
Yet recent days have seen dividend cuts announced by a wide range of companies that are aiming to preserve cash. But, with a bit of due diligence, investors can still find robust dividend yields on offer. And prices of many these companies are a lot cheaper than they were in January.
There are several companies I’d consider buying, especially if there is any further weakness in their share prices in the coming weeks. In the FTSE 100, they include BT Group, Pennon Group, Royal Dutch Shell, Tesco, and Vodafone.
In the FTSE 250, I like Centamin, ContourGlobal, Dechra Pharmaceuticals, and Tate & Lyle as potential long-term investments.
Making the right decisions in stock market investing is not necessarily about constantly picking winning shares and funds. Rather it is about having a long-term strategy. So if you are unsure where to begin, a low-cost FTSE 100 or FTSE 250 tracker fund might also be appropriate.
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tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group and Tesco. 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.