The FTSE 100 has been on a wild ride in 2020. The index started the year trading at 7,600. It then rallied to nearly 7,700 before beginning its descent.
In just a few days at the end of February, the UK’s leading blue-chip stock index lost around 1,000 points.
The FTSE 100 joined other indexes around the world as they sold off on concerns about the coronavirus outbreak. The good news for investors is that, since the beginning of March, it seems as if markets around the world have stabilised.
That being said, there’s no telling if volatility will return. We just don’t know how severe the COVID-19 outbreak will ultimately become. And that’s the big question.
Still, if you’re saving for retirement, or have a long-term investment outlook, trying to predict what’s in store for the stock market over the next 12 to 24 months is a waste of time.
Many happy returns
We know that over the past 120 years, the UK stock market has produced an average annual return of 5.5%, after inflation. This period includes two major world wars and multiple economic recessions and depressions. It also covers the Spanish flu pandemic, which killed 50m people worldwide after WWI.
As noted above, we don’t know what impact the coronavirus outbreak will have on the global economy and healthcare system. But, history gives us some guide as to the type of returns investors can expect if they invest with a long-term perspective.
That’s why buying the FTSE 100 at current levels could be a good investment. There’s no telling which direction the index will take in the short term, but over the long run, historical returns suggest the index can produce an annual return of 5.5%, or more.
Compound interest
At this rate of return, an investment of £100 a month for 30 years would grow to be worth £92k. That’s assuming the money is left alone, and the power of compound interest is left to work its magic.
What’s more, multiple studies have shown that trying to time the market is a waste of time. As it’s impossible to tell what’s in store for the market in the near term, it’s just as impossible to pick the bottom.
That means no matter how much time and effort you spend trying to predict what the future holds for the market, the forecasts are almost sure to be incorrect.
In other words, there is never a right time to buy stocks. You should just invest whenever you can. Over the long term, it won’t matter whether you bought the index at 6,500 or 6,400. What matters is time in the market.
A scratch on the record
That’s why it could make sense to buy the FTSE 100 right now. As long as the global economy continues to expand over the longer term, the index should produce positive returns.
From a long-term perspective, the current volatility is nothing more than a scratch on the index’s performance record.