How should you be investing now? Stock markets can be confusing and scary places at times, and they don’t always seem to make a lot of sense. But the FTSE 100 recovery above 6,000 shows exactly how you should invest today.
There are only two types of investors in the world. Those who can’t time the market, and those who don’t know yet that they can’t time the market.
Greedy better than fearful
The FTSE 100 recovery shows the precise importance of staying invested for the long term. At one point, like you, I was thinking I should have sold out of all my investments in order to buy them back more cheaply. The FTSE 100 was dropping like a fridge being chucked off a cliff.
All my hard work in picking the best long-term investments seemed to be disappearing before my eyes. The FTSE 100 swung as low as 4,993 points before 23 March, rebounding from there. There have been ups and downs, but it has mainly risen ever since.
Those people who fearfully sold out of all their investments and are still waiting for another leg downward probably feel a little silly now. By contrast, if you were greedy and snapped up cheap FTSE 100 shares, you’re likely to be feeling pretty pleased with yourself.
And fistfuls of cash are doing absolutely nothing to improve your net worth.
Sentiment
Stock markets are driven by sentiment. And with the US and UK now having a timetable to reopen, sentiment among investors is recovering strongly.
American stock markets like the S&P 500, the tech-focused Nasdaq and the Dow Jones Industrial Average tend to pull UK indexes along with them. When the Yanks rise, the FTSE 100 and FTSE 250 move up too.
And the US central bank, the Federal Reserve, has all but guaranteed a floor for share prices with massive quantitative easing (that is, free money) and historically low interest rates.
We do have to remember that the stock market is not a replica or exact mirror of the economy. Markets are forward-looking, and so it’s a reasonable assumption that the worst of the economic pain was priced into March’s epic crash.
Time in the market
In the meantime I’ve been doing what I’ve always done, and drip feeding any spare cash I have into my favourite long-term FTSE 100 shares.
I would strongly favour the word ‘spare’ here. Money you need immediately to pay your bills has no business being in investments.
But money that is just sitting around in a bank account is always better earning you a return than none at all. The Bank of England has slashed interest rates to near zero. This means money tied up in a Cash ISA is gaining a pitiful 1% interest rate.
People with a long-term view have little choice for compound gains than to invest in good quality stocks and shares.
If you like a share, buy it. If it’s at a cheap valuation and you believe in the long-term business model, buy it. Waiting for shares to fall lower before pulling the trigger only leads to one thing. Banging your head against the wall for having spotted a trend but not buying-in sooner.