The FTSE 100’s recent market crash is likely to have left many investors with paper losses on their holdings. The vast majority of UK-listed companies have been negatively impacted by weak investor sentiment caused by the impact of coronavirus on the world economy.
In the short run, assets such as gold and even Cash ISAs may outperform declining FTSE 100 stocks. But, for long-term investors, now could be the right time to buy financially-sound businesses that have strong market positions.
Risk/reward
While some FTSE 100 companies are trading at exceptionally low levels, investors may wish to focus their capital on those businesses. They are, after all, among the most likely to survive the uncertain outlook for the world economy.
They’re likely to include companies with low levels of debt and large amounts of cash. They may be better able to overcome a severe drop in sales. They could also stand a better chance of emerging from the current crisis in a relatively strong position. Their peers may experience greater financial challenges. That could provide an opportunity for stronger businesses to also grab market share.
Although the best businesses in the FTSE 100 may not be among the cheapest, on a risk/reward basis, they could be the most attractive. Focusing on the value of a business, rather than solely on its price, may lead to higher returns in the long run.
Relative appeal
The FTSE 100’s recent decline may reduce its appeal in the eyes of some investors. They may determine that safer assets, such as gold and Cash ISAs, offer superior risk/reward opportunities than large-cap stocks.
However, low interest rates mean that in many cases Cash ISAs offer unfavourable return prospects. They may also fail to keep up with inflation. This could lead to a loss of your spending power over the long run.
Likewise, investing in physical gold may not prove to be a sound move. The precious metal is trading at a relatively high level. That means it may struggle to repeat its recent gains as investor sentiment towards riskier assets improves.
As such, on a relative basis, the FTSE 100 appears to be a more attractive opportunity for long-term investors. Its past performance suggests it’s likely to recover. And buying high-quality shares today could lead to impressive returns in the coming years.
Getting started
Of course, it’s never been easier to invest in FTSE 100 shares. Accounts such as a Stocks and Shares ISA are simple and straightforward to open, with the process taking a matter of minutes online. And, with the cost of buying shares falling as online sharedealing becomes ever-more popular, the potential for almost anyone to invest in FTSE 100 stocks is high.
While the road to recovery may not be a smooth one for the FTSE 100, its past performance suggests now could be the right time to capitalise on its low valuation through buying a diverse range of companies.