The FTSE 100 and other major stock indices remain highly volatile. One day they’re down, the next day they’re up. In an environment that’s characterised by extreme uncertainty, share prices are likely to react heavily to any news, good or bad. As we saw yesterday, any positive news about a potential vaccine is likely to have a particularly strong effect. On the other hand, any sign of cases picking up again is likely to be negative for stock prices.
The FTSE 100 is currently in no-man’s land. It’s still well below the levels we saw before the virus really hit in February, but it’s also well above the lows of March. I don’t actually think this is bad news for investors, especially those with time on their side.
Benefiting from FTSE 100 volatility
If the FTSE 100 rises, then this is obviously good for those of us who already own shares. It increases the value of our investments. And as long as we’re not thinking of retiring any time soon, there’s still plenty of time for our shares to get back to where they were before Covid-19.
When the FTSE 100 falls, it’s also good news, for those of us in a position to invest. Market falls present us with more attractive price levels to buy shares. This increases the likelihood that our investments will produce superior returns. This is especially the case if we hold for the long term and reinvest our dividends. Therefore, if we want to invest, we should be cheering when prices fall, although I’m sure we would all like this to happen in a different context!
The legendary investor, Warren Buffett, liked to compare stocks to hamburgers. He said that ‘’when hamburgers go down in price, we sing the Hallelujah Chorus in the Buffett household. When hamburgers go up in price, we weep’’.
The point is that if we’re buying something, we should be happy when prices come down, as long as what we’re buying hasn’t become worse. In the long term, I don’t believe that FTSE 100 stocks have become any worse, despite the doom and gloom. Lower prices allow us to get more for our money and buy more shares.
Here’s what I’m doing
As someone that already owns stocks but would like to own more, it feels a bit like a win-win situation at the moment. If shares fall, I’m happy because it presents new buying opportunities. If shares rise, I’m happy because it increases the value of my investments. As long as markets remain in limbo, I’m going to carry on buying shares, ideally every month.
Those who are nearer to retirement are in a different position. Given the uncertainty, it probably isn’t the best time to be investing all of your future retirement fund into stocks, if the funds are going to be needed soon. In this case, I would recommend focusing on safer investments, like high-quality bonds. If you need higher returns, then you may need to buy shares too, but I would stick to safe FTSE 100 shares in this instance.
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Thomas 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.