These are tough times for investors. But I’d consider investing £10k in the FTSE 100 now. I’ve read several commentators comparing the falls we’ve seen in the markets to the crash back in 1987.
But I reckon it could be shaping up to be an even bigger event. Perhaps more comparable to the credit crunch and recession beginning in 2007.
I know the causes are different and, so far, the financial system is standing up to the strain. But just today I read an article on Reuters suggesting things could get worse for the financial system.
Falling markets can offer opportunities too
Shares have been falling along with commodity prices, including precious metals such as gold and silver. In that respect, it feels to me more like it did back in 2007-2009, with almost everything appearing to plunge together.
Anything could happen from where we are now, of course. We could even see the FTSE 100 slip back further, maybe below 4,000 as it did 11 or so years ago. However, back then, the bear market lasted for almost two years. And it’s possible the indices could drift lower in the months ahead too.
There’s carnage in the ‘real’ economy because of the way governments are discouraging social gatherings and the movement of people. It’s hard to imagine anything other than a serious general economic slowdown in the months ahead.
Yet despite all the worry, doom and gloom, serious set-backs in the markets always offer opportunity as well. And there are plenty of people suggesting a contrarian approach to investing.
Buy now, when you least feel like it, the argument goes, and you could be glad you did when markets ‘normalise’. However, that approach is tricky. If you buy too soon, you’ll likely suffer losses if the markets and share prices fall further. And if you have remained fully invested all the way down, you could be dealing with seriously reduced ‘firepower.’
Proceeding with caution
And I wouldn’t try to time the markets by pushing the ‘buy’ button with my full £10k all in one go. Even if I thought the FTSE 100 was ridiculously low. To me, the safest approach is to drip-feed the money in. If the index and share prices do move lower, you could be glad you took such a conservative approach.
But a programme of regular monthly investments into the shares of high-quality individual FTSE 100 companies, or into an FTSE 100 index tracker fund, could serve you well in the years ahead.
I’d aim to hold my investments in a tax-efficient wrapper such as a Self-Invested Personal Pension (SIPP) or a Stocks and Shares ISA. And I’d set things up so dividends are automatically reinvested along the way to ensure the investment compounds over time.
In times of big reversals, such as the one we’re seeing now, I believe the FTSE 100, and some of the individual shares within it, can be good vehicles for riding a recovery in the markets later.
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Kevin Godbold has no position in any share 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.
Motley Fool UK 2020