Since the March stock market crash, the FTSE 100 has staged a modest recovery. But the index has experienced some extreme volatility along the way. While some of its constituents have performed exceptionally well, others have struggled.
As such, if you’re looking to profit from the stock market recovery, it may be best to own a basket of the market’s top-performing stocks and invest with a long-term time horizon.
FTSE 100 recovery
While the market has recovered from its March lows over the past few weeks, the FTSE 100 may yet experience further difficulties in the coming months.
The coronavirus pandemic is an unprecedented event, and it has already caused significant economic pain around the world. We’re only just starting to see the fallout of the crisis on economic data. It could get a lot worse over the next few months.
But the economy has experienced many such painful periods in the past. The financial crisis in 2009, the tech bubble in 2003, and the 1987 crash all caused the FTSE 100 to drop significantly. However, in the years following, the market always went on to make a strong comeback.
We may see the same recovery this time around. Such an outcome isn’t guaranteed, but history suggests that investors buying today, with a long-term outlook, could be well rewarded.
Buy defensive
Buying defensive FTSE 100 stocks to profit from the market recovery may be the best solution. Defensive stocks tend to perform better during periods of economic uncertainty than their cyclical peers.
Therefore, as we don’t know what the future holds for the global economy, it may be best to buy companies with these qualities. These businesses are also less likely to cut their dividends due to their defensive income streams. That may mean they’re more likely to generate a growing, passive income over the long term.
Companies like Unilever, Reckitt Benckiser and British American Tobacco are already showing their strengths. All three FTSE 100 businesses have announced that coronavirus is having a limited impact on their operations. That may mean they could outperform in the years ahead as the market recovers. They could even improve their competitive positions in the coming years.
Diversification
Buying these companies may help you benefit from the stock market recovery. However, as the outlook for the global economy is so uncertain, it may be best to buy a wide selection of these defensive businesses.
Owning a wide selection of stocks in different sectors and industries will allow you to benefit from their recovery while minimising downside risk.
So, while the world economy faces an uncertain future, now could be the time to buy FTSE 100 stocks. By building a diverse portfolio of high-quality businesses and then holding them for the long term, you could improve your financial prospects.