The markets have been wild, and I’m sure people are wondering if now is a good time to invest in stocks. The crash that ended in March shaved almost 2,500 points off the FTSE 100 in a little over four weeks. Now we have a new bull market, and the UK’s main index is above 6,000 again. But the markets are still jittery – one day they are sharply down, only to recover the next – as they react to both bad and good news.
Yet now is as good a time as any to invest in FTSE stocks, if you can ignore the short-term chaos. Right now, quality FTSE 100 stocks are cheaper than they were six months ago. How much will they be worth in three, five or even 10 years? That is the right question to be asking, not what will happen to the price in the next few weeks or months.
In the short term, things will continue to be messy. Over longer time horizons, though, the case for stocks looks good. Central banks and governments are doing all they can to stimulate the economy, interest rates will remain low for the foreseeable future, and economies are slowly getting back to work. In five or 10 years, the stock markets will likely be higher than they are now. Investors need a way to ignore the short-term volatility and focus on the long term.
In my opinion, the best way to deal with volatility in the markets is to invest regularly come rain or shine. While sitting on the sidelines waiting for a 10% dip might sound like a winning plan, it appears to underperform investing a regular amount each month.
Time in the stock market
Trying to time the market is not useful for the majority of investors, so removing the guesswork by setting up a regular investment makes sense. However, regular investing with a twist also works. With this method you would still invest regularly, let’s say £100 per month as a baseline, but you tweak the amount depending on what stock prices have done.
If stocks are up over 5% in the previous month, cut the investment to £75, and for gains over 10%, only invest £50. If stocks have fallen by more than 5%, put £125 to work, and for +10% drops invest £150. I looked at how this strategy performed compared to regularly investing £100 each month, using monthly FTSE 100 price returns going back to 1995, and assuming a 3.4% average dividend yield. The table below should help clarify the plan for regular investing with a twist.
|Stocks up over 10%||£50||0.50|
|Stocks up over 5%||£75||0.75|
|Stocks up or down between -5% and 5%||£100||1|
|Stocks down by more than 5%||£125||1.25|
|Stocks down by more than 10%||£150||1.50|
Regularly investing in the FTSE 100 could have built £64,359 of wealth since 1995 and doing it with a twist could have netted £64,696 in total assuming no fees. Either plan could serve as a foil to what I think are the two most common investing mistakes. The first is to sell up when markets tumble, just before they turn around. The second is not investing in a bull market, fearing a correction, only to watch them climb higher. Investors could be making the second stock market mistake right now.
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James J. McCombie 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.