The FTSE 100 index has traditionally been thought to contain the UK’s safest equity investments. But year-to-date, its value has fallen 23%. The coronavirus pandemic has created an unprecedented shift in global economies, initiating major volatility in financial markets.
Increase stock exposure, limit risk
So does that mean Footsie investing is now a big risk? Well, one way to invest directly in the FTSE 100 index is to choose an index tracker fund. This allows you to own a basket of stocks, rather than just a few, creating diversification and lowering risk. Index funds are popular with beginners to stock market investing because they’re simple to understand and affordable.
There are many funds to choose from, which invest in companies from a specific sector, market theme or index. The FTSE 100 index makes a popular choice for beginners because it gives investors access to ownership of the UK’s largest 100 companies with limited risk. The FTSE 100 is home to well-known British names such as BT, BAE Systems, Barclays, Tesco and Vodafone.
Why choose a FTSE 100 index tracker fund?
Sectors thriving in the lockdown are proving a popular choice for themed index fund investments. These include the FMCG, pharmaceutical and IT sectors. However, this also means they’re priced at a premium. I think a diversified fund is a better option for beginners. This includes a FTSE 100 index tracker fund.
Index funds are subject to the ups and downs of the financial markets, but by being invested in multiple stocks, across a range of sectors, you dilute your risk.
Is this a good time to buy shares?
Among the market fluctuations, many leading-edge companies have shed a fortune from their market capitalisation. Some of these had over-inflated share prices that were due a correction. Others are now unfairly in bargain-basement territory.
The trouble with some favourite companies in the FTSE 100 index is that their dividends were the main driving force behind shareholder investment. Particularly for long-term income investors. Many of these companies have cancelled their dividends for 2020, meaning they’re no longer as attractive to investors.
However, many of them are still great companies and by cutting their dividends they’ll survive the pandemic.
If you do your homework and look for companies that can survive and thrive, then this could be a great time to buy shares. Key points to look for include management integrity, a manageable level of debt, and the likelihood it will overcome the pandemic and grow.
Billionaire investor Warren Buffett sometimes uses a price-to-earnings ratio (P/E) to gauge if a stock is priced fairly. The general rule is a P/E of less than 10 could be a value play. However, too low a P/E could mean the company carries risks. The P/E is not a deciding factor, but it’s a useful metric to check when evaluating a company’s stock price.
The ups and downs of stock market investing can be nerve-wracking, particularly during periods of extreme volatility. Try to look at the bigger picture. Investing is a long-term game that benefits those that last the distance. Hold your nerve, stay calm, don’t panic and be confident in the shares you purchase.
I think there are value stocks available just now, but if you’re nervous, then a FTSE 100 index fund is a great alternative investment for beginners.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays 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.