Starting to invest in the FTSE 100 today may not seem to be a sound idea. After all, the stock market has experienced a significant fall in recent weeks, which could continue in the near term.
However, lower share prices mean more attractive valuations and higher dividend yields. Therefore, for someone aged 40, or anyone with a long time horizon, now could be an opportune moment to buy a diverse range of FTSE 100 stocks while they appear to offer favourable risk/reward ratios.
Long time horizon
Investing in the stock market is a relatively risky proposition, compared to other popular assets such as cash and bonds. The FTSE 100’s recent performance provides evidence of this, with the index falling by over 1,000 points in a matter of weeks, due to the risks posed by the spread of coronavirus.
However, at 40, you’re likely to have a long time to wait until you choose to retire. In fact, you may have 25+ years until you stop working, which is likely to be more than sufficient for the stock market to recover from the current downturn. Evidence of this can be seen in the past performance of the index, with it having recovered from every one of its bear markets and corrections since its inception.
Therefore, buying undervalued shares while they offer high yields today could lead to impressive returns in the long run, which improve your retirement prospects. With the FTSE 100 currently having a dividend yield of 5%, and its historical annualised total return at around 8% since its inception in 1984, its potential to boost your financial future seems to be high.
Getting started
Thanks to online sharedealing, buying FTSE 100 shares is far simpler and cheaper than many individuals realise. Opening a Stocks and Shares ISA could be a sound move, since it provides tax efficiency compared to a bog-standard sharedealing account. It also offers flexibility, in terms of withdrawals being available anytime without penalty, while it’s also cheap to administer.
Buying a diverse range of shares could be a worthwhile move. Holding multiple stocks in your portfolio can reduce risk and mean you’re less dependent on a small number of businesses to fund your retirement. Should you have limited capital initially available to invest, buying a FTSE 100 tracker fund could be a logical first step. It provides exposure to all of the stocks in the index for a minimal cost.
Maintaining your focus
Although the stock market may fall further in the short run, and you could experience paper losses, in the long run it has recovery potential. The low valuations and high yields on offer could put you in a stronger position when it comes to building a retirement portfolio.
Therefore, maintaining your focus on the long run, rather than worrying about the short term, may help you to capitalise on the FTSE 100’s attractive valuation at the present time.