The FTSE 100’s recent market crash has been replaced by a rebound. That is good news. But a challenging economic outlook may cause the index’s performance to deteriorate in the coming months.
As such, some investors may feel that less risky assets such as Cash ISAs and bonds offer more appeal at the present time.
However, predicting the prospects for the FTSE 100 is almost impossible. Therefore, buying a range of high-quality stocks today while they trade at low prices ahead of a likely recovery in the long run could be a worthwhile strategy.
A continued market crash
The FTSE 100’s past bear markets have often included mini-rallies. In other words, short periods of time when investor sentiment has improved and the index’s price level has made strong gains.
However, those mini-rallies have often been followed by a return to declining stock prices. Yes, the FTSE 100 has made impressive gains from its March lows. But this does not necessarily mean that it is now set to deliver a strong and uninterrupted recovery for the remainder of 2020.
There are risks, such as the potential for a second wave of coronavirus, weak business confidence and geopolitical tensions between the US and China. These could all weigh on the index’s performance. Therefore, investors may experience a period of high volatility over the coming months. This could cause the valuations of their holdings to come under severe pressure at times.
FTSE 100 recovery prospects
Of course, the index has recovered from every one of its previous downturns and bear markets. As such, a recovery over the coming years seems to be very likely as the world economy returns to growth and investor sentiment improves.
Investors who can live with the possibility of paper losses in the short run may be in a strong position to take advantage of the low valuations currently on offer across the index. Many sectors are currently unpopular among investors. But these are the sectors that could offer wide margins of safety to produce high returns in the future
Building a portfolio
I would buy the most attractive companies within a variety of sectors. That way, an investor can build a diverse portfolio of stocks positioned to take part in the FTSE 100’s recovery. Fiscal policy and monetary policy in the UK and across the world economy is likely to be supportive of an economic turnaround. So the prospects for investors could be more positive than the index’s price level currently suggests.
As such, now could be the right time to start buying large-cap shares while they offer wide margins of safety. They may not produce a speedy return to their previous highs, of course. But over the coming years they are likely to experience a bull market that boosts your financial prospects.