This year’s stock market crash presented investors with an excellent opportunity to buy bargain FTSE 100 shares. However, since the crash in late March, many FTSE 100 stocks have erased their losses.
This may have put some investors off buying into these companies. But that could be the wrong decision as we don’t know what the future holds for the stock market.
Don’t wait for a stock market crash
Investors could be waiting for another stock market crash to buy bargain stocks. This doesn’t make much sense because it’s impossible to time the market. Some studies have shown that investors who do try to time the market end up worse off over the long term than those who don’t.
With this being the case, it may not be sensible to wait for the next stock market crash to buy bargain FTSE 100 shares. It could be years before the next market crash arrives, and investors who sit on the sidelines until one arrives may miss out on significant gains.
As such, the best approach could be to pound cost average your investment into the market.
Pound cost averaging
Pound cost averaging is a great way to invest in the market without having to worry about market movements. Put simply, the approach involves buying a set amount every month. That could be £500 a month in a basket of FTSE 100 stocks, for example. By using this approach, investors buy more shares in a stock market crash and less when the market rises.
This may help improve long-term investment returns as buying high-quality stocks at low prices can yield higher returns.
By setting up an automated plan, the process also removes any emotion from the process. What’s more, the set monthly contribution ensures investors are only putting as much into the market as they can afford.
Research shows this approach is a great way to build wealth over the long term. Indeed, £500 a month invested in the FTSE 100 over the past 30 years would be worth about £750k today.
Investors who followed the pound cost averaging approach would likely have done much better than those who waited for a big stock market crash during this period. There have only been three significant crashes in the past 30 years. Each stock market crash came as a complete surprise.
Its unlikely investors would have been able to invest right at the bottom as well. It’s only possible to know when the market reached its low after the event.
Therefore, rather than waiting for the next stock market crash, the best approach for investors may be to invest regularly in a basket of high-quality FTSE 100 stocks. It could be years before the next stock market crash arrives and there’s no guarantee investors will be able to pick the bottom, or make the most of the decline when it eventually happens.
In the meantime, high-quality FTSE 100 stocks should continue to provide attractive returns for investors.
The post Stock market crash: why I’m not waiting to buy FTSE 100 shares appeared first on The Motley Fool UK.
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Rupert Hargreaves owns no 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