The stock market is garnering increased attention as global economies venture into uncharted territory. Since the March market crash, investors and analysts alike have been speculating whether the stock market will crash again. There have been fluctuations, but the government subsidies appear to have kept things under control. Does this mean it is a good time to invest in the stock market? For many, I think it could be an excellent time, particularly for cheap FTSE 100 stocks. However, you must weigh your personal circumstances and financial goals.
Choosing your risk level
Investing in the stock market carries an element of risk for everyone, but some shares are riskier than others. The simplest way for beginners to determine how risky stocks are is to consider the UK markets. I consider the FTSE 100 the safest because it contains the top 100 companies by monetary value. The FTSE 250 comes next and AIM is much riskier and generally to be avoided by newcomers to stock market investing.
However, even FTSE 100 stocks carry risk and as a shareholder, you should be prepared for this. Taking on too much risk will lead to sleepless nights, but if you play it too safe, you might not reach your financial goals. If time is on your side, you may like to diversify your portfolio with a selection of asset classes to reduce your risk and increase the likelihood of making more money.
Volatility is inherent
As anyone watching the stock markets can see, fluctuations are par for the course. Some stocks have been going up and down like yo-yos lately. Watching too closely can make you confused and likely to panic. If you are a worrier and do not think you can cope with the day-to-day volatility, then you may prefer something less risky like index funds or bonds. However, risk and reward generally correlate, and history has shown us that over time stock markets tend to go up, not just recovering losses but also reaching new highs.
The power of compounding
Compounding is a powerful force in value investing. By reinvesting your returns, such as the income you receive from dividends, you boost your earning power. This power also comes from topping up your investments regularly, for example, through a monthly direct debit into a Stocks and Shares ISA. Increasing your pot by resisting the temptation to withdraw any gains, means your investments grow at a faster rate.
Do you have the drive and willpower to stay invested while ignoring the daily fluctuations in favour of the bigger picture? If so, I think value investing for the long-term seems like the sensible option. It has worked for billionaire Warren Buffett for decades and for many others following his playbook. Global uncertainty has caused many stocks to drop below their intrinsic value, meaning there are cheap FTSE 100 shares available today. You just need to choose companies you believe to have the staying power to go the distance.
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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.