Investing £100k in FTSE 100 shares today may seem a risky way to try to make a million. After all, the stock market crash may not yet be over. High levels of volatility could lead to paper losses in the short run, which may be severe in some cases.
However, valuations across the FTSE 100 suggest that now could be the right time to buy stocks. Their recovery prospects and track records of enjoying bull markets after bear markets are proven. That may mean investing £100k, or any other amount, in high-quality businesses could increase your chances of generating a seven-figure portfolio in the long run.
Fair valuations
The FTSE 100’s decline means that the index is trading at the same level as it did over 20 years ago. As such, many of its members are trading on valuations not seen since the last bear market in 2009. In some cases, FTSE 100 shares are even cheaper than they were back then.
However, the key focus for investors should be on paying a fair price for a business instead of a low price. In other words, the economic outlook over the coming months could be very challenging. Some stocks may not survive, or may need government help to do so. This means choosing stocks that have financial strength is key. Think low debt levels and solid free cash flow that can help them overcome short-term challenges.
Those companies that are more likely to survive the upcoming economic difficulties may not be the cheapest in the FTSE 100. But they could be the best value. Their current prices may reflect a risky outlook that they are ultimately likely to overcome. Focusing your capital on them may mean you get a relatively attractive risk/reward ratio compared to buying ultra-cheap-but-high-risk stocks.
Economic moats
One aspect of businesses that investors may wish to consider when purchasing stocks is their economic moats. For example, they may have a high degree of customer loyalty, unique products or lower costs than their peers. A wide economic moat may not necessarily protect a business from economic difficulties in the short run. But it may enable them to fully capitalise on the likely economic recovery in the coming years.
Governments and central banks are pumping billions into the economy, and potentially going further in this regard in the coming months. So many FTSE 100 stocks could offer recovery potential. After the financial crisis, many large-cap shares went on to post high returns. Among those businesses most likely to partake in a recovery could be those with competitive advantages. As such, they may be the most attractive investing opportunities at the present time.
Making a million
Clearly, investing £100k, or any other amount, in FTSE 100 shares today is unlikely to yield a high return in the short run due to the risks facing the economy.
However, the FTSE 100’s total returns since inception (around 8% per annum) mean that even if the index performs as it has done in the past, it would take around 30 years to make a million from a £100k investment. Through buying high-quality businesses with wide economic moats at fair prices, though, you could reduce the amount of time it takes to make a million.