The FTSE 100’s recent decline is showing little sign of ending any time soon. This can cause some investors to naturally feel worried and even fearful about the performance of their portfolios. But the reality is that stock markets experience such declines fairly regularly.
The past performance of the FTSE 100 shows that it has always recovered from corrections and bear markets. This could make now the right time to buy stocks for the long run while they trade on low valuations. Doing so could boost your long-term financial prospects and improve your chances of retiring early.
Recovery potential
The FTSE 100’s recent decline means that it is now in a bear market. In other words, it has fallen by more than 20% since its recent peak. The last time this occurred was during the global financial crisis, when the index went on to fall by around 50% from its previous high.
A similar fall may or may not occur over the coming months. However, what does seem likely is that the index will recover from its present-day woes over the coming years. It has experienced several bear markets since its inception in 1984, with its first notable decline coming in 1987. Since then, it has gone on to post new record highs, with investors who have bought shares during its downturns generally benefitting from low prices and subsequent gains.
As such, now could be the right time to buy a range of FTSE 100 shares. Certainly, the index could move lower in the short run, and you could experience paper losses. However, past recoveries have often taken place without any prior warning. And, by the time they become obvious to investors, it is often too late to capitalise on them.
A simple process?
Buying shares right now is a simple process on the one hand, but challenging on the other. Opening a Stocks and Shares ISA is a cheap and quick process that can be undertaken in a matter of minutes. Likewise, building a portfolio of shares is fairly simple at the present time, with many FTSE 100 stocks trading on low valuations and commission costs being low.
However, investor emotions could make the process of buying shares much more challenging. It is natural to feel concerned about the near-term outlook of your portfolio, since the FTSE 100 could realistically decline yet further.
Therefore, focusing on the index’s past recoveries, ensuring that you obtain wide margins of safety when investing, and purchasing high-quality businesses with strong balance sheets could help to make the process easier. Doing so may provide you with sufficient confidence to capitalise on the FTSE 100’s recent decline, benefit from its likely recovery over the coming years, and improve your chances of retiring early.