The FTSE 100 index has come a long way from March’s stock market crash. Green shoots of growth in the economy are also visible now. Moreover, continued policy support are keeping financial markets buoyed as well. But the impact of the crash is still palpable. Compared to an average of 7,558 in January this year, the FTSE 100 is still at a subdued 6,203 in July. In other words, it’s 18% lower than its highs. We are also yet to declare victory over Covid-19. Economic forecasts aren’t always encouraging either. At this time, I think it’s a good idea to invest £5,000, but we need to proceed with caution.
Invest £5,000 with a mix of FTSE 100 stocks
To put it another way, when investing £5,000 in this environment, I think an investor should be well-guarded against any unexpected stock market falls. But investments in FTSE 100 companies should also promise good returns. My go-to method for growth investments right now is a mix of defensives and cyclicals.
Defensives are a natural hedge in bad times. Their products and services are so crucial that their demand remains relatively strong even in recessions. Think of healthcare companies and utilities as examples. This shows up in their share prices too, which don’t fluctuate as much as those of cyclicals.
Cyclicals, as the name suggests, are companies whose demand varies according to the business cycle. During booms, they do very well and vice versa, simplistically speaking. As a result, their share price can fluctuate far more than that of defensives. Buying them at low prices can be rewarding for patient investors. Healthy FTSE 100 cyclicals rebounding in good times can make millionaires of investors.
As a growth investor, the higher the risk I can withstand, the more I should invest in cyclicals and less in defensives. The opposite is applicable if I’m risk averse. Defensives like the healthcare company GlaxoSmithKline and consumer goods giant Unilever are good examples of defensive FTSE 100 stocks, with still affordable price-to-earnings (P/E) ratios. Cyclicals like the hospitality group Whitbread and real estate biggie Persimmon are investments to consider as well, in my view.
Dividends are down, not out
It’s also nice to earn a passive income. Dividends have been either cut back or suspended by many FTSE 100 companies, making it increasingly difficult to allocate a proportion of an investment of £5,000 in them. Still there are some that still offer good dividends. One of them is the oil biggie BP and another is the utility company National Grid.
The only catch to investing for dividends right now is that it calls for agility. If a company stops paying dividends, we may well want to re-allocate those investments. However, if that just isn’t how you roll as an investor, a combination stock is ideal. These stocks offer a mix of both growth and dividends. Even if dividends are cut back, they still offer share price growth. A good example of this is the miner, Rio Tinto. This approach can help me make gains from investing £5,000.
Manika Premsingh owns shares of BP. The Motley Fool UK has recommended GlaxoSmithKline and Unilever. 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.