As the FTSE 100 has plunged, many investors have locked in paper losses by selling their shares. It is understandable – if everyone else seems to be selling stocks, the impulse to do so too is really powerful.
If you did sell on the footsie’s way down, there are many good reasons to buy back in before it rebounds. Especially if you realised a loss this year.
Historically, stock market crashes are followed by recoveries. By not making the most of the 2020 bear market and buying cheap FTSE 100 shares, you could miss out on the recovery and making that million.
Here are three other reasons to do it:
Diversify your portfolio
Bonds have long been considered ‘safe’ assets. In times of uncertainty, many investors dump their FTSE 100 stocks and buy bonds to try to limit the losses on their stocks. Consequently, footsie share prices plummet and bond prices rocket. Likewise, in more optimistic times, many investors buy stocks and sell bonds to try to make big gains.
Dividing your portfolio between stocks and bonds reduces your risk of loss for both asset classes. However, it’s far better value to increase your holdings of each class at the best time, which is when they’re selling for bargain prices.
Bonds are on sale when many investors are buying stocks and selling bonds – in a bull market. But, for FTSE 100 stocks, the best time is when many investors are buying bonds and selling their stocks – in a bear market.
Reduce your risk on the FTSE 100
Investors always risk being wrong. It goes with the territory of investing. However, not overpaying on any investment reduces your risk of smaller returns, losing money, and being wrong!
Many investors, myself included, buy into companies listed on the FTSE 100 because they are great companies. Most are well run with good prospects for the future. Consequently, shares for these companies are in high demand, which pushes up the share price.
Moreover, inflated share prices can make for fairly speculative purchases, even for FTSE 100 listed companies. This is because a business cannot physically grow and profit at the rate expected of it by the high market price. At a certain point, investors stop buying the shares and the stock price begins to drop.
This speculation increases an investor’s risk as the more speculative a stock, the smaller your return becomes. For this reason, as stocks get more expensive, they become riskier.
You can’t eliminate risk but you can manage it. Buying FTSE 100 stocks when on sale is a great way to do this.
Get higher returns
The future value of an investment depends on the purchase price. The higher the price, the lower the return, especially for income investors. Therefore, it makes sense to buy stocks when they’re on sale.
Bear markets provide a great opportunity for buying stocks on sale but it’s true that there is a risk of the share price going down further after you buy. However, for a long-term investor, this temporary drop should not be a big concern. Moreover, market irrationality often means a pessimistic bear market is unjustified, and historically, a recovery will follow.
Now is a great time to reduce your risk and diversify your portfolio by adding cheap FTSE 100 stocks to increase your returns and make that million.
Rachael FitzGerald-Finch 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.