London’s blue-chip index broke its all-time high last week, nudging past the previous record of 7,903.5 set in May 2018. In a matter of weeks the Footsie has now quadrupled its 0.9% gain for the whole of last year. Nearly half my overall portfolio is invested in the index. So, should I follow the ‘buy low, sell high’ mantra and cash in my FTSE 100 shares while the going is good?
Is the FTSE 100 now overpriced?
The first thing that might lead me to sell my shares (or at least some of them) is if the UK market became as overvalued as the US market did 18 months ago. There, valuations became irrelevant for software and meme stocks.
For me, a symbol of the speculative excess was space tourism firm Virgin Galactic, which was valued at over $15bn in the summer of 2021. That was despite it generating next to nothing in revenue and nowhere close to even starting commercial operations.
There were dozens of similar examples, before the sharp pin of rising interest rates popped the bubble. Virgin Galactic stock has descended 90% since 2021.
However, I don’t really see anything like that at the moment in the FTSE 100. The index itself seems fairly valued, with a market price-to-earnings (P/E) ratio of 14.2. That’s slightly below its historic average, even after its recent rise.
An international index
If the revenue of the FTSE 100 was derived mainly from the UK, then I’d be cautious with the index trading near an all-time high. That’s because the outlook for the UK economy still isn’t great, despite the Bank of England now forecasting a milder recession than previously feared.
However, approximately 75% of FTSE 100 firms’ revenues come from outside the UK, making the index’s composition truly multinational. So with China reopening and global inflation seeming to cool, I think it makes perfect sense to see the index doing well.
Indeed, I wouldn’t be surprised at all to see it reach new highs over the coming months.
Buy low, sell high?
Charlie Munger famously said that the first rule of compounding is to never interrupt it unnecessarily. And because FTSE 100 dividend payers such as Legal & General and National Grid form an important part of my long-term compounding strategy, I certainly won’t be selling them.
More generally, I don’t believe anyone can consistently predict market movements. That’s because buying low and selling high is a very difficult thing to actually do in real life. Share prices fluctuate every day, so unless I have a crystal ball, it’s impossible to know where prices will head next.
Plus, I’d have to be right twice. I’d have to time when to sell. Then I’d have to correctly judge a near-bottom market point to buy back in. Compounding this difficulty is the fact that the market’s biggest rises happen on a small number of days in any given year. Therefore, if I missed out on one or two of these lucrative days, I’d sabotage my own performance.
To me, the solution is simple. I just stay invested regardless of market fluctuations. This way I don’t have to worry about timing the market, and can take advantage of the power of compounding over time.
