If the recent stock market crash has whetted your appetite for investing, join the club! Although falling share prices can be frustrating for those already holding stocks, there’s no denying market set-backs also contain the gift of opportunity.
You only need look at the FTSE 100 index’s long-term chart to see that every trough has been followed by another peak. In other words, the Footsie has good form when it comes to bouncing back from its lows.
Why the FTSE 100 keeps bouncing back
That’s no accident. There’s sound logic behind the FTSE 100’s undulations. If you examine the make-up of the index, you’ll see many of the largest companies reside in highly cyclical sectors, such as banking, mining, oil and housebuilding.
And many shares in those sectors have fallen a long way in this crisis. For example, names such as HSBC, BP, Royal Dutch Shell, Rio Tinto and Lloyds. Indeed, the falls among cyclical stocks have often exceeded those of more defensive operators such as AstraZeneca, GlaxoSmithKline, Diageo and Unilever.
It makes sense the cyclicals have plunged the furthest because their businesses stand to suffer the most in recessions and economic downturns. The damage to their operations may not be fully evident yet, but the stock market looks ahead. That’s why it marked those shares so far down.
However, because the market keeps looking ahead, it’s always trying to anticipate the next recovery as well. We saw some evidence of that last week in the strong bounce-backs and upsurges among cyclical stocks. It seems the market was responding to news the coronavirus crisis may be flattening in terms of the figures for those infected.
Where I’d put my £500
Perhaps previous assumptions about the depth of the economic carnage ahead began to look too harsh, and the market adjusted its expectations. Remember, many individual investors drive the market, so they’re applying a lot of collective brainpower to the puzzle!
But last week’s market action demonstrated how fast the cyclical stocks can handbrake-turn and begin marching up again. And that’s why the FTSE 100 index itself is so bouncy. I see it as an excellent vehicle for riding the next up-leg in the markets.
So, if I had a lump sum of £500 to invest right now, and nothing more for the time being, I’d put it into an FTSE 100 tracker fund held within a Stocks and Shares ISA. But I’d also be sure to select the Accumulation version of the tracker fund. This automatically reinvests the dividend income back into the fund for you.
However, I wouldn’t stop there. Regular investment is key to building wealth. So I’d aim to pay monthly sums into my investment. That allows the process of compounding to build my nest egg for retirement.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended AstraZeneca, Diageo, HSBC Holdings, and Lloyds Banking Group. 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.