Ten years ago, the FTSE 100 was reeling from its worst bear market in a generation. It traded at around 4,400 points, having been exceptionally volatile in the first few months of 2009.
Back then, investor sentiment was extremely weak. There were fears that major companies could go under, and that the declines in the FTSE 100’s price level over the preceding couple of years could continue.
However, unbeknown to investors at the time, the FTSE 100 would go on to experience a decade-long bull market. Since May 2009, the index has gained around 65%, while also paying a generous dividend.
While that may now seem obvious due to the level of stimulus that has been administered by central banks, the track record of the index shows that it has an ability to always recover from downturns. Learning that lesson could stand investors in good stead in future.
Cyclicality
While the financial crisis may be an event that few present-day investors will easily forget, it is a normal part of the stock market’s returns profile. In other words, the index is cyclical, and experiences a major downturn with surprising regularity.
Prior to the financial crisis there was the dotcom bubble. Before that, other notable bear markets included Black Monday in 1987, as well as the oil crisis in the 1970s. Of course, there have been many other major downturns for the index. The key takeaway from all of them, though, is that the index has gone on to post a recovery that has seen it make new record highs.
Fear
During a bear market such as that experienced in 2009, it is difficult to focus on the fact that the FTSE 100 has always recovered from its major declines. Just as during bull markets, when it feels ‘different this time’, it is the same during bear markets. The financial crisis, for example, felt like the end of the financial system as it was known at the time. However, looking back, it may prove to be a mere bump in the road for the FTSE 100 and its growing price level.
Therefore, one lesson which many investors learnt during the financial crisis is that buying during the worst parts of a bear market is generally a good idea. Certainly, it can lead to short-term losses and severe strain on a portfolio should share prices fall further. But with the FTSE 100 having always recovered from the worst recessions over the years, buying a diverse range of stocks when other investors are queueing up to sell them could lead to high returns in the long run.
Outlook
Of course, the next decade is impossible to predict. Should the FTSE 100 fall and go on to experience a bear market, investors who survived the financial crisis a decade ago may be more alert to buying opportunities, rather than worrying about the performance of their portfolios over the short run.
At the present time, though, there seem to be a number of FTSE 100 stocks that offer wide margins of safety that could make them worth buying for the long run.