The FTSE 100’s recent market crash has been among its fastest and most severe in history. As such, many investors may have now become very cautious about buying shares for the long term.
The FTSE 100 may be facing an unprecedented set of circumstances, due to the economic impact of coronavirus. But it’s experienced severe declines in its past. The good news for investors is it has always recovered. However, the bad news is things could get worse before they improve.
But if you to have a long time horizon until you retire, you could benefit from buying undervalued shares ahead of their likely recovery.
Time horizon
Investing in FTSE 100 shares today for the long term could lead to substantial paper losses in the near term. During bear markets, it’s almost impossible to accurately predict when a recovery will take hold. In many cases there are ‘false bottoms’, where the stock market seems to have reached its lowest ebb, only to then trade lower.
As such, investing today requires you to have a long time horizon. Although it may take several months, or even years, for the FTSE 100 to recover, past performances suggest this outcome is highly likely. Therefore, you could improve your retirement prospects through buying high-quality businesses currently trading at low valuations.
Diverse portfolio
Due to the uncertain outlooks for a wide range of sectors, diversifying is crucial. For example, the impact of coronavirus on the airline industry could be substantial. Likewise, the UK housing market looks set to experience a marked slowdown. Ensuring your portfolio contains companies from different industries and different geographies could therefore help to reduce your overall risk.
Should you have limited capital to build a portfolio of shares, buying an index tracker fund could be a shrewd move. It’s a cost-effective and simple means to gain exposure to the wider stock market. However, with the cost of buying individual shares now relatively low, investing in a diverse range of companies may be more accessible than many realise.
Tax efficiency
Investing through a tax-efficient account, such as a Stocks and Shares ISA or a SIPP, may improve your long-term return outlooks. They can reduce your tax bill, since investments aren’t subject to tax. They’re also relatively simple and cost-effective to open and administer and are available from many different providers.
Buying a diverse range of FTSE 100 stocks in a tax-efficient account may not significantly improve your retirement prospects in the near term. But history suggests it may ultimately help to bring your retirement date a step closer.
The FTSE 100’s track record of growth, despite experiencing various crises, suggests buying its members while they’re undervalued could be a worthwhile strategy. It could improve your long-term financial outlook.