In this market crash, you might have been following the FTSE 100 and thought about selling your shares and moving into a ‘safer’ investment, like a Cash ISA. I certainly have.
It is easy to see why many people are selling their stocks. Since the start of the year, the FTSE 100 has lost roughly 24% of its value. The future of the global economy is very uncertain and consequently, some investors have adjusted their risk tolerance levels.
A significant fall in the valuation of your portfolio can hurt, and it might make you reconsider your investment strategy.
Is now the time to sell your stocks and to move into something ‘safer’ like a Cash ISA?
Nothing is safe
Every investment carries a level of danger.
Although on the face of it, buying into a Cash ISA might seem less risky than buying individual stocks and shares, I think this logic is flawed.
Some assume that a Cash ISA cannot lose money. To an extent, this is true.
However, in my view, the risk comes from the investment not keeping up with the rate of real-life inflation. £1 today will not be worth the same amount in 30 years.
For a long-term investor, I think the option which offers the best risk-to-reward ratio is by investing in shares. There are greater opportunities for growth, especially in this market.
This is especially true when dividend payments are used to buy more shares. This is called compound interest and is when your investment literally earns interest on interest. Over time, this can supercharge your initial investment.
Rather than selling my holdings in this market, I’m a buyer.
Why I’m buying FTSE 100 stocks
Like other stock markets around the world, I believe the FTSE 100 has plenty of buying opportunities for value investors.
I believe companies like Unilever, which has suffered a 14% drop in its share price in the past six months, is now trading at a price below its intrinsic value.
In August 2019, I analysed Unilever. Back then, its price-to-earnings ratio was 23, which I thought was a bit steep. Now, its price-to-earnings ratio is just 18.
There are other companies in the FTSE 100 that I believe are now undervalued. However, there could be another way for investors to make money off this market.
Investing in index funds
If you are unsure about picking individual stocks, I think it might pay to look at index funds. These aim to track the chosen market, and often at a low fee. This could offer an investor a great, simple way to build a diversified portfolio of shares quickly.
This removes the need to actively manage your holdings. As the FTSE 100 contains the top 100 listed companies, each time a company falls out of the index, it is automatically replaced by another stock.
I feel the FTSE 100 is now very cheap, and that the potential rewards for a long-term investor are much more abundant than what a Cash ISA would offer.