As the FTSE 100 nears record highs, can I profit?

At FTSE 100 has reached its highest distance this week. As I write on Tuesday, it is at 1% of that level.

But while the FTSE 100 is rising – and has gained 3% in the past year – it’s not the same story across all stock markets. In the same period, for example, the FTSE 250 index has fallen by 12%. So, instead of investing in the larger index, should I sell all my shares and put the money into FTSE 250 companies?

Here are three reasons I don’t think so – and one reason to support the move.

High prices and value

Does a high index price mean that the stock is overvalued?

Indefinite. The FTSE 100 looks expensive compared to historical levels. But this cannot be a useful comparison for me as an investor.

Take one of the member companies in which I have shares, JD Sports. It is sure to make a profit record this year. That can support a higher stock price than previous retailers, using valuation methods like the price-to-earnings ratio.

Just because FTSE 100 stocks as a group reached a higher collective price than before does not mean they are overpriced relative to their future earnings potential.

Buy a stock not an index

Some companies can be underestimated even in expensive indexes. By the same token, a low FTSE 100 level does not guarantee that a particular stock offers good value.

If I buy an index tracking stock, I can look at things from a different angle. But when choosing individual shares I offer long-term value relative to what I paid for them, I focus on each share price in isolation.

What the broader index does is not create good or bad value for my portfolio.

Past and future performance

What has happened in the past in the stock market is not always an indicator of what will happen next.

A new high may be followed by the FTSE tumbling. Alternatively, it can reach that level and then plateau for years. Or the index could continue to rise and reach a succession of new high points in a bull market in the coming years.

So when deciding whether to increase or decrease exposure to FTSE 100 stocks, I ignore the historical performance of the index. I try to stay focused on the future.

Future growth expectations

But when I see good reasons to hang on many FTSE 100 shares, I also fall in price of some FTSE 250 shares can give me a buying opportunity.

These are companies with a smaller market capitalization than those in the index of 100 leading companies. This may mean their business has more room to grow.

As the economy recovers in the coming years, looking at companies with strong growth prospects can be a worthwhile investment strategy. That’s why I’ve added some beaten-down FTSE 250 stocks to my portfolio in recent months, like abrdn and Dunelm.

I see opportunities in both indexes and am actively looking for attractive shares to buy from either.