UK stocks started the first trading day in the new month on a down note after notching a robust April for the benchmarks. On Friday, the FTSE 100 and FTSE 250 indexes were down around 2.3% and 1.8% respectively. As I write, we do not yet know how Monday will close. But the City is debating whether broader markets may face deeper declines in the rest of the month. Will this downturn lead to increased risk aversion levels across shares?
It is anyone’s guess whether May has indeed begun on an ominous note. Yet I believe the recent coronavirus crash as well as any potential further declines may create an opportunity, especially for long-term investors. History tells us that eventually economic slumps end and robust shares go on to make new highs.
Compound interest is powerful
For many people, investing in shares may initially sound confusing. They may also think that they do not earn enough money to buy stocks. But even if you only have a few pounds to spare every week, you can invest, and your money could grow with compound interest over time to a surprisingly large amount.
Let’s assume that you are now 35 years old with £25,000 in savings and that you plan to retire at age 65.
You decide to invest that £25,000 in a fund now and make an additional £3,000 of contributions annually at the start of the year. You have 30 years to invest. The annual return is 6%, compounded once a year. At the end of 30 years, the total amount saved becomes £394,992.
Saving £3,000 a year would mean being able to put aside around £250 a month or about £8 a day. Might you just be wondering if you should skip that next impulse purchase?
And if you were to increase the amount of annual contributions from £3,000 to £6,000, the total amount saved becomes £646,397. That would be the power of time and compound interest at work together.
Getting started with FTSE investing
The most famous index in the UK is the FTSE 100 which began in 1984. Most companies in the index are multinational conglomerates.
The FTSE 250 index consists of the 101st to the 350th largest companies listed on the LSE. It was launched in 1992. Companies in it usually have a more domestic focus.
Since February, we have witnessed a market crash. Year-to-date, the FTSE 100 and FTSE 250 are down about 24% and 27% respectively. These declines mean they are now in bear market territory.
I must highlight that these decreases in index levels do not include the regular dividend payments made to shareholders. In 2019, average dividend yields for the FTSE 100 and the FTSE 250 were about 4.5% and 2.8% respectively.
Yet recent days have seen dividend cuts announced by a wide range of companies. But, with a bit of due diligence, investors can still find robust dividend yields on offer. And prices of many these companies are a lot cheaper than they were in January.
There are several companies I’d consider buying, especially if there is any further weakness in their share prices. In the FTSE 100, they include BAE Systems, BT Group, Pennon Group, and Tesco.
In the FTSE 250, I like Britvic, Centamin, ContourGlobal, Greencoat UK Wind, and Tate & Lyle as potential long-term investments.
Making the right decisions in stock market investing is not necessarily about constantly picking winning shares and funds. Rather it is about having a long-term strategy.
