A long-term stock market recovery may seem unlikely to some investors at the present time. Risks such as Brexit and coronavirus may mean that they decide to invest in less risky assets, such as cash and bonds.
However, the track record of the stock market suggests that a sustained rally is very likely to take place over the coming years.
Therefore, with stock prices currently low in many cases, now could be an opportune moment for a 40-year-old, or anyone with a long time horizon, to start buying FTSE 100 and FTSE 250 shares.
The prospects for a sustained long-term stock market recovery
Although a stock market recovery is never guaranteed, the past performances of the FTSE 100 and FTSE 250 suggest that it’s very likely to take place in the coming years. Both indexes have been able to rally to previous highs following their past downturns.
For example, the 1987 crash, the dot com bubble and the global financial crisis wiped 50%+ from the value of the stock market in a short space of time. Within a number of years, a recovery had not only taken place, but the stock market had reached new record highs.
Therefore, a stock market recovery from the 2020 market crash may yet take time to fully materialise. The recent rally in many UK shares may not be sustained. But for an investor who has sufficient time for a recovery to take place, buying shares today while they trade at cheap prices in many cases could be a logical move.
Building a portfolio from scratch at age 40
Clearly, it is tough to build a portfolio from scratch at age 40, or any other age for that matter. However, the potential for a stock market recovery means that achieving a high single-digit return is very realistic for many investors. After all, that’s the same as the returns produced by the FTSE 100 and FTSE 250 over recent decades.
Of course, buying high-quality businesses at low prices may be a means of outperforming the wider stock market. Investor sentiment towards many UK shares is currently weak. But that’s due to their uncertain near-term prospects. So there are opportunities to buy undervalued stocks.
Over time, they may produce relatively high returns since they are starting from a lower base. As such, they may have a positive impact on the value of an investor’s retirement nest egg.
As mentioned, short-term risks could hold back a stock market recovery in the coming months. Therefore, it is crucial to adopt a long-term outlook and to diversify across a range of industries and regions.
In doing so, an investor may be able to reduce overall risks, obtain a relatively impressive return, and enjoy greater financial freedom when they choose to retire.