The FTSE 100’s recent crash may lead some investors to consider buying other assets, such as Bitcoin. Some investors tout the virtual currency as a means of diversifying your portfolio.
However, the stock market’s track record suggests buying undervalued FTSE 100 shares today could be a better idea than purchasing the virtual currency. They could deliver strong recoveries. And they may provide more favourable risk/reward opportunities relative to Bitcoin.
Crash, then recovery
The FTSE 100’s history is filled with periods where market crashes have taken investors by surprise. Since inception, the index has experienced a handful of major crises that have wiped billions from its value. All of those bear markets have one thing in common. The FTSE 100 has successfully recovered from falls of as much as 50%+.
At present, a recovery from the index’s recent crash may not seem especially likely. The government is continuing to warn case numbers of coronavirus will, sadly, increase over the coming weeks and even months. However, in previous bear markets it was also difficult to see a path to the FTSE 100’s recovery. But, over time, the index was able to not only recover its lost ground, but to go on to produce new record highs.
Undervalued stocks
Therefore, buying FTSE 100 stocks during bear markets has consistently been a sound means of capitalising on the index’s cyclicality. This strategy may not yield instant returns, but the track record of the stock market suggests there’s a high chance of enjoying a recovery from the index’s current lows over the coming years.
Since many of the index’s members have modest debt levels, strong free cash flow, and enviable market positions, it’s possible to ascertain their risk/reward potential. Investors can, for example, purchase relatively low-risk stocks should they wish to do so. Likewise, they can buy strong businesses that operate in cyclical industries which may benefit the most from a possible recovery.
Bitcoin’s risks
The same situation isn’t available buying Bitcoin. The virtual currency has no fundamentals, so investors cannot make an informed decision on whether it’s overvalued or undervalued at the present time. This increases its risks, and could mean investors fail to buy into the cryptocurrency at a favourable time.
Looking ahead, Bitcoin’s regulatory risks and its limited size could hamper its progress in the coming years. They may mean it ultimately fails to replace traditional currencies. Investor sentiment may, therefore, be subject to rapid change.
As such, buying a diverse range of FTSE 100 shares, and holding them for the long run, could be a better idea. The track record of the index highlights its potential to recover from its current lows. It could produce high returns for investors who purchase high-quality businesses while they trade on low valuations.