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Last week saw the UK's flagship index of top shares, the FTSE 100reached a record. But does an all-time high make it a good or bad time for a stock market beginner to start investing?
To answer that question, it's important to understand the broader context.
What an index is and what it is not
An index contains some stocks; In the case of the FTSE 100, these are the 100 London-listed shares with the largest market capitalization (and which also meet other requirements).
That means it represents a portion of the market (albeit a significant one in the case of the FTSE 100), not all of it.
This can be seen by comparing the contrasting performances of the FTSE 100 (up 13% over the last five years) with that of the FTSE 250 index for smaller capitalization companies (-5% in the same period).
On top of that, as companies with growing capitalizations move to the top index and members that shrink enough are relegated to the FTSE 250, there is an inherent bias.
That may mean that the FTSE 100 hitting an all-time high doesn't necessarily mean that the 100 companies that were in it five years ago have performed as well on average as the composite index does today.
Why do I buy individual stocks?
It may seem a little confusing. But making money in the stock market is serious business!
You may have spotted another potential concern for those investing in the FTSE 100. While the index may perform well, some individual stocks could be complete dogs and then deservedly get dragged down to the FTSE 250.
But if an investor simply bought the best stocks, not the dogs, they could probably outperform the FTSE 100, by a significant margin.
I like to buy individual stocks, not the index, because I think it gives me the ability to outperform the index. However, that is not an easy goal.
This brings me back to the original question: whether now is a good time for a stock market newbie to start buying stocks.
The answer is: it depends. but in that?
For someone to start investing now (or at any time), what determines their likely success or failure is not what the FTSE 100 does. It's about what shares they choose to buy and how much they pay for them.
Hunting for bargains even as FTSE rises
So while the FTSE 100 has been in great form, I think some of its shares could be potential bargains for an investor to consider buying.
An example that deserves further investigation is M&G (LSE: MNG). The FTSE 100 asset manager is a household name with millions of clients. I see it as a strength, as it helps differentiate itself from its rivals.
The company operates in a market that has high demand. I think it's likely to stay that way in the long run.
One risk I perceive, as an M&G shareholder, is that the company saw its clients withdraw more funds than they brought in in the first half of last year. If that trend continues, earnings could suffer.
For now, however, M&G remains around 15% below its 12-month high and yields 9.7%.
