The recent market crash has been scary. But if you’ve got some cash set aside, I think now could be a brilliant time to start investing, especially in some of the big FTSE 100 stocks.
This might seem a strange view to take during the current crisis. But history suggests that we will get through this. And when we do, we’ll need most of the same products and services we were buying before the lockdown began.
Today I want to share three tips from the Motley Fool for investing during a bear market. If you’re thinking about buying FTSE 100 shares, I think these will get you off to a great start.
Don’t try to time the FTSE 100
On Monday last week, the FTSE 100 dropped below 5,000 for the first time since 2009. On Tuesday, the FTSE rose by 9.1% – the second biggest one-day gain on record.
So is the market rising or falling? I don’t know. In my experience, a market crash is often followed by a period of volatility, when share prices bounce around a lot. We may see some false dawns before the real recovery begins.
My suggestion is that you don’t try to time the market. I’d just start buying now.
Over the last 35 years, market crashes have always been a great time to buy the FTSE 100. The big crashes in 1987, 1999, and 2008 were all followed by strong recoveries, even though things seemed grim at the time.
As long as you have a long-term view, I think the risks of buying today are pretty low.
Buy stocks you can hold for years
I’m sitting on some big paper losses after this month’s crash, but I’ve not sold any shares and I’m not too worried. Over time, I’m confident that most of the companies I own will recover.
I can afford to take this view because I intend to hold my shares for many years, ideally forever.
This is one of the secrets of the stock market. In the short term, it appears to be unpredictable and risky. But over many years, shares generally rise. Over the last 100 years or so, the UK stock market has returned an average of about 8% each year. That’s much better than cash or bonds.
I only buy dividend stocks
However, I only buy shares that pay a dividend. There are a couple of reasons for this.
Firstly, dividend payouts are generally much more stable than share prices. In my experience, it’s much easier to hold onto shares during a market crash if your dividends keep coming.
The current crisis is an exception – many FTSE 100 dividends have been cancelled. But I expect most of these payouts to be resumed within a year or two, as things start to return to normal.
Another advantage of income stocks is that I can use my dividends to buy more shares. In turn, these will pay dividends too. Over time, this reinvestment (known as ‘compounding’) can lead to very big gains with very little effort.
For example, a £10k investment with a yield of 5% that’s reinvested over 10 years would be worth £16,288. But if you withdrew the 5% yield each year, you’d only get a total of £10,500.
Compounding was described by Albert Einstein as the eighth wonder of the world. I believe it’s a great reason to start buying FTSE 100 shares today.