Big numbers are arriving for unemployment. And GDP is well down. Indeed, we face possibly the worst general economic recession in a generation – perhaps in generations. We may not be out of the woods yet when it comes to crashing FTSE 100 shares.
Meanwhile, the prices of Bitcoin and gold have been trending up since mid-March along with the rally we’ve seen in the general stock market. So, should I invest in Bitcoin, gold, or shares today?
Why I’d invest in crashing FTSE 100 shares now
For me, the answer to that question is the same every time. It’s shares all the way, and for some very good reasons. But before I consider them, let’s look at why gold and Bitcoin are so unappealing.
The argument against investing in Bitcoin and instruments that track the price of gold is a simple one – both gold and Bitcoin lack any reliable fundamentals that may drive their prices higher. Of course, both do move higher, and they can crash back down again as well. But the main impetus behind movements in their prices is speculation.
Shares, on the other hand, are backed by businesses. But we must be careful when investing in shares. And, happily, by the time companies have grown large enough to enter the FTSE 100 index, they’re usually quite stable. Indeed, many have financial strength with support from cash-producing businesses. Often, earnings are robust and there’s a strong tradition of paying shareholder dividends among constituents of London’s lead index.
However, even the FTSE 100 can be a volatile hunting ground. Whatever their size, not all businesses are equal. And I’d firstly divide them is into two piles. The first would contain defensive businesses with cash-generating operations that remain little affected by the ups and downs of the wider economy.
We can find many defensive companies in sectors such as pharmaceuticals, energy suppliers, utilities, fast-moving consumer goods and others. I’m thinking of names such as GlaxoSmithKline, National Grid, Severn Trent, British American Tobacco, Diageo, and Unilever.
Sensitive cyclicals
My second pile would contain stocks with cyclical underlying businesses. Earnings in those beasts will be sensitive to the ups and downs of the wider economy. We can find them in sectors such as banking, resources, retail, travel and leisure. I’m thinking of names such as BHP, HSBC, Lloyds Banking, Burberry, and Whitbread. We’ve seen recently what can happen to those type of stocks in a general economic downturn.
And I’d also separate the FTSE 100 into two more piles of faster-growing businesses and fading business. Generally, the faster-growing companies can be found nearer the bottom of the index where market capitalisations are smaller. But they have room to grow!
However, there are decent opportunities in all the categories I’ve identified in the FTSE 100. And I’d deal with the current market volatility by investing regularly rather than all in one go. With a long investing time horizon in mind, I reckon FTSE 100 shares can help me compound my way to early retirement.