The FTSE 100‘s move back over 7,000 last week continues the bounce-back from the coronavirus plunge last year.
And the Footsie has a long history of staging dramatic recoveries. Buying a FTSE 100 index tracker during the lows in 2020 would have been a good idea. But I reckon it’s always worth me keeping a portion of my portfolio invested in the index. Especially if I add funds regularly.
A staged investment programme for the FTSE 100
The great thing about investing in stages is I’m not committing my money all at once. So when the index dips I’m potentially getting a bigger slice of the underlying stocks. And when the index hits its peaks, I’m not investing everything at the highs.
Such pound-cost averaging can work well with a programme of dividend reinvestment aimed at compounding gains. For me, the solution is to invest monthly into a FTSE 100 index tracker that automatically rolls the dividends back in. So I’ve chosen the accumulation version of the fund rather than the income version, which would otherwise pay the dividends into my account.
I think the index keeps bouncing back from its lows because many of the largest constituent companies run cyclical operations. But the stocks in the index are weighted by market capitalisation. And that means another factor is the share price movements of the largest companies drive most of the Footsie’s movements.
By market capitalisation, the top 10 biggest companies are interesting. For example, there are several recovering quality defensive stocks. Such as fast-moving consumer goods companies Unilever, Reckitt Benckiser, Diageo and British American Tobacco. And rebounding pharmaceutical companies AstraZeneca and GlaxoSmithKline. All those great stocks are off their highs and I’d be glad to have them in a long-term portfolio now.
There’re also some big cyclical companies near the top of the index, giants such as HSBC bank, miners Rio Tinto and BHP, and oil companies BP and Royal Dutch Shell. I think it’s a good time to invest in shares like those, so I’m glad they’re helping to drive the Footsie.
Why I’m hoping for Footsie 20,000!
But investing in the index isn’t just about catching a short-term bounce. Many companies in the Footsie have diverse international operations and the long-term outlook is positive for many. I see the level around 7,000 as potentially one step in a much longer move higher over several years. Will we see FTSE 8,000 next? Probably. But what about FTSE 20,000? I believe it’s possible within a timeframe of several years. We’ve certainly seen advances as big as that before from the FTSE 100.
One possibility is that general price inflation will keep the index buoyant as companies raise selling prices and generate higher revenues. Another is that businesses will thrive and grow. Maybe upcoming smaller companies in the index will expand operations and take over the top positions.
However, as we’ve already seen, the Footsie is capable of some dramatic cyclical dips as the underlying share prices move down. We could easily see further falls and a further drop well below 7,000. That risk would be elevated if we see another general economic downturn. Despite my bullishness, it’s possible for me to lose money on my regular FTSE 100 tracker investment.
Nevertheless, I’m sticking to my investment programme.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Diageo, GlaxoSmithKline, HSBC Holdings, 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.