The FTSE All-Share index contains more than 600 London-listed companies from small caps through to the largest on the market. It’s a combination of all the companies in the FTSE 100, FTSE 250 and FTSE SmallCap indices.
FTSE shares can help you beat the market With so many stocks to choose from in the FTSE All-Share, I reckon most investors can find enough candidates to build a diversified portfolio. Over time, you could beat the performance of the general stock market if you choose wisely.
However, some of those 600+ companies will have weaker underlying businesses than others. We’ve seen this year how changes in the general economic landscape can really hammer the operations of the more cyclical enterprises. I admit that a pandemic is quite an extreme event, but nevertheless, the cyclical firms generally suffer in an economic downturn.
And when you’re investing for the long haul, cyclical swings in share prices and profits can lead to your investment going almost nowhere over decades in some cases. So I’d be wary of cyclical stocks and treat them as shorter-term commitments aimed at capturing a cyclical up-leg.
When it comes to retirement-focused long-term investments, for me, cyclicals such as miners, oilers, retailers, banks, and housebuilders are off the agenda. At times, I admit such stocks can look tempting because of low valuations and high dividend yields. However, even when looking cheap, I’ve seen many such shares plunge by more than 50%. And we never really know when such moves will happen again.
Shares I’d be likely to avoid for a long-term, buy-and-hold portfolio include popular names such as BHP, BP (LON:BP), Lloyds, Taylor Wimpey (LON:TW), Whitbread (LON:WTB) and Marks & Spencer. And within the FTSE All-Share index, I’d steer clear of many others too, including some of the smaller-cap shares.
Shares with great underlying businesses But there are some companies in the All-Share with great underlying businesses. And they tend to be those with defensive, cash-generating operations that are less affected by the ups and downs of the wider economy. Indeed, we’ve seen recently through the coronavirus crisis just how resilient some of those underlying enterprises are.
You’ll find many defensive shares with great long-term prospects in sectors such as healthcare, fast-moving consumer goods (FMCG), energy, information technology (IT) and utilities. And to build a retirement portfolio to compound my investment pot, I’d start by building a watch list of these excellent businesses.
I’d add to my list popular, big-cap names such as AstraZeneca, GlaxoSmithKline, Diageo (LON:DGE), Unilever (LON:ULVR), National Grid (LON:NG), SSE (LON:SSE), Sage, British American Tobacco (LON:BATS) and Severn Trent (LON:SVT). The key for me is to watch for opportune moments to pounce on the shares such as during dips and down-days, or when a bout of temporary bad news hits the price.
But I’d also add shares with smaller market capitalisations that have room to grow, such as PZ Cussons (LON:PZC) and Premier Foods. One day, they may expand into larger businesses and your investment in them could grow too.
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Kevin Godbold owns shares of PZ Cussons and Premier Foods. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended Diageo, Lloyds Banking Group (LON:LLOY), and Sage Group (LON:SGE). 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.
Motley Fool UK 2020