Investing £5k, or any other amount, today may seem to be a very unwise decision. The FTSE 100 has declined heavily in recent weeks. It could also remain high volatile in the coming months. This may lead to substantial paper losses which disrupt your financial prospects.
However, investors with a long time horizon may be better off buying shares now while the FTSE 100 offers a wide margin of safety. They could generate significantly higher returns compared to other assets, which may help to bring their retirement date a step closer.
Asset allocation
While the FTSE 100’s recent crash may make assets such as cash and bonds seem more attractive, the opposite may be true. The FTSE 100 has a track record of experiencing booms and busts following each other throughout its history. Therefore, investors who buy shares during a bear market when prices are low can position themselves effectively for the upcoming bull run.
By contrast, holding cash, bonds or other low-risk assets may lead to disappointing returns in the long run. Interest rates look set to remain low for a prolonged period, as policymakers seek to provide support to the economy. This may mean that holding cash or bonds leads to below-inflation returns, which gradually reduce your spending power. This may push back your retirement date rather than help bring it a step closer.
Fundamental focus
In terms of which stocks are worth buying in the market crash, investors may wish to focus on company fundamentals when making their choices. For example, buying stocks with solid balance sheets could be a good starting point. This increases their chances of not only surviving the economic downturn, but also expanding their market share.
So too could buying companies with track record of performing relatively well during a mixture of operating conditions. They may be less impacted by the prospective economic downturn, and could outperform many of their riskier, cyclical businesses. And, though buying stocks with highly affordable dividends, you could boost your total returns in the long run. A significant portion of the FTSE 100’s past total returns have, after all, been derived from the reinvestment of dividends.
Time horizon
One of the most challenging aspects of investing during a bear market is seeing your portfolio decline in value. However, for long-term investors, any losses from their portfolio are not crystallised until they are sold. And, since there are likely to be many years left until you retire, there could be sufficient time for your holdings to recover.
Therefore, now could be the right time to buy high-quality FTSE 100 shares and hold them for the long run. Further risks may be ahead, but the return potential of the index appears to be high.