Does it make sense to own a lot of FTSE shares in my pension? After all, diversification is important to an investor when it comes to risk management.
I think it can make sense for me to own a lot of such shares, if I buy the right ones at the right price. There are a hundred different shares from a variety of industries in the FTSE 100 index alone. So I think I can diversify my pension sufficiently even if I invest heavily in such shares.
Proven business models
Buying a FTSE share is not a guarantee of success for an investor. Some companies start to do worse, lose value and fall out of the index of top 100 shares, for example. The same is true for the FTSE 250 and FTSE 350.
So why do I pay attention to whether a company is in an index when buying its shares? Consider the FTSE 100. It is a collection of the largest companies listed on the London Stock Exchange. To grow in size and value, typically a business needs to be doing something right. It will likely have beaten a lot of competition along the way.
Hunting for value
Past performance is no guarantee of future success. However, many FTSE 100 firms have a track record of profitability and surviving economic downturns. That makes them attractive to me.
But buying strong companies is only part of the investing approach adopted by the most successful investors (like billionaire Warren Buffett). Long-term returns also depend on buying shares in these companies at the right price. That is why I am happy to stuff my pension with FTSE shares if they are cheap – but not when they are overpriced!
Currency risks
The past few years have seen the pound moving around quite a bit. As an investor, that can have an impact on me.
For example, in my pension I own shares in FTSE 100 member British American Tobacco as well as US rival Altria. BAT pays quarterly dividends in sterling. Altria also pays quarterly dividends. They are in dollars, but get converted into sterling in my pension. That can affect how much I earn, even if the dividends themselves are unchanged.
Imagine I sell my Altria shares for the same price (in dollars) that I paid for them. If the pound has weakened, I will actually get more than I paid for them (in sterling). If the pound has strengthened, I will get less. All of that is despite a flat share price.
Although currency changes could benefit me or hurt me, I have no way of controlling them. They add another layer of risk to my investments. FTSE businesses can also face currency risks, for example when translating overseas profits to pounds.
But as a shareholder, most FTSE shares do not expose me directly to currency risks when it comes to buying or selling, or receiving dividends. I see that as one more reason to hold them in my pension.
