How to Mitigate Risks When Investing in the FTSE 100

There’s a great deal to be said for investing in indices and mutual funds, as these entities offer you access to a relatively broad range of assets and a naturally diverse portfolio.

Buying shares in indexes can also offer you access to high value and blue-chip stocks, with the popular FTSE 100 offering a relevant case in point.

However, while this index is home to household names such as BP, Vodafone and Tesco, investing in the FTSE 100 is a deceptively risky endeavour. We’ll explore some of these risks in further detail below, while asking how investing through a managed fund may help you to overcome these.

What risks are associated with the FTSE 100?

While representation within the FTSE 100 varies from one year to the next, some sectors remain more prevalent than others.

For example, consumer staple brands accounted for 19.67% of the index as of December 31st, 2020, while equities in the financial services space represent a further 18.44%. Along with energy stocks (which have recently become less dominant but current account for just under 9% of the market), such sectors comprised nearly 50% of the FTSE 100 as we entered 2021.

What is noticeable is the absence of tech companies, which don’t dominate in the same way as this sector does in the S&P 500, due to the likes of Apple, Google, Facebook, Microsoft and Tesla for example.

Despite the variation of sector weightings within the FTSE 100, one immediate observation is that the index lacks a little from the perspective of diversity. This fact is amplified by the dominance of just five individual stocks within the index, with Shell, HSBC, BP, AstraZeneca and GlaxoSmithKline comprising approximately 32% of the total market value by free float.

Overall, the top 10 account for 48% of the index’s total market cap, creating far less opportunity for natural diversification over time.

Of course, investors are also inclined to invest in the FTSE 100 in the belief that it provides an insightful barometer of the UK economy. However, this isn’t really the case in the current economic climate, with the index dominated by international brands that actually generate 71% of their total revenues outside of the UK. You’ll need to keep this in mind before investing in the FTSE 100, as the reality of the index may be far removed from your initial perception.

Why investing through a fund manager is a possible course of action

Another key FTSE 100 risk is the glaring lack of technological stocks, particularly reliable and blue-chip equities such as Microsoft, Google and Apple.

In fact, the index has considerable overexposure to a handful of sectors including financial services, personal goods and oil, which is bad news unless you happen to be targeting one of these markets through your portfolio.

The question that remains, of course, is whether there are ways in which you can invest in the FTSE 100 while compensating for this distorted sector split.

The short answer is yes, especially if you target the FTSE100 as part of a managed fund. After all, this will combine FTSE 100 stocks with a variety of carefully chosen equities, creating a more diverse fund that has been optimised from the perspective of risk and potential rewards.

Of course, such funds are also overseen by an experienced fund manager, ensuring that they offer the best opportunities in terms of their potential yield and risk management.

You can also target funds with variable caps and risk propositions too, enabling you to create a portfolio that truly aligns with your philosophy.