Investing in the leading index of UK blue-chip shares has been modestly rewarding over the past 12 months. Over the past year, the FTSE 100 has grown by 4.5% in value. That compares to a 19.5% contraction in the value of the FTSE 250 index over the same period. So owning the FTSE 100 in the past year, for example through a tracker fund, would have given me some capital gain as well as dividends.
But can this positive trend continue against the backdrop of spiralling inflation and a weakening economy? Or is the FTSE 100 set to crash at some point?
Will the FTSE 100 crash? The answer to that question is yes – it will crash at some point. But nobody knows when. It could be next week – or it might not happen for decades.
A stock market crash typically refers to a fairly fast fall of 20% or higher. Even the weak performance of the FTSE 250 over the past year does not quite put it into that territory.
The logic of the FTSE 100 is that it is composed of some of the biggest and most established UK companies, such as HSBC and Unilever. Such companies have typically weathered many recessions and economic shocks before. They do still face risks to revenues and profits from falling consumer confidence and inflation. But well-managed big firms are often more resilient in tough times than smaller ones with limited financing and novel business models.
Not only that, but the FTSE 100 does not look especially expensive to me right now. Although it is close to all-time highs, many individual shares in the index have what I see as an attractive valuation. HSBC, for example, trades on a price-to-earnings (P/E) ratio in single digits.
The FTSE 100 could crash, but I do not see any particular trigger for it to do so right now. I remain invested in a number of FTSE 100 shares. As a long-term investor, if I own what I see as quality shares, even dramatic swings in their prices do not keep me up at night.
Should I prepare?
However, just because I am not specifically expecting a stock market crash any time soon, that does not mean that I am not preparing for one. After all, I know the stock market will crash again at some point in future – I just do not know when.
So, what am I doing to prepare? For me, successful long-term investing involves identifying great businesses and then buying shares in them when they are attractively priced. So right now, I continue to update my shopping list of shares I would like to buy for my portfolio – at the right price. For example, I would happily own FTSE 100 member Spirax-Sarco. But its P/E ratio of 36 looks expensive to me.
By having such a list on hand, I am ready to snap up selected FTSE 100 shares during the next market crash – whenever it comes. The bargain hunting window can be short — so it pays to be ready!
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C Ruane has positions in Unilever. The Motley Fool UK has recommended HSBC Holdings and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.