Investing £10k, or any other amount, in the FTSE 100 today may not be an appealing idea to all investors. After all, the stock market’s recent crash has wiped billions of pounds from the index and left many investors with severe paper losses.
However, now could be the right time to buy high-quality businesses for the long term. They could offer recovery potential due to their low valuations. Through buying a wide range of them and holding for the long term, you could improve your chances of retiring early.
Financial strength
Perhaps the most important aspect of investing during a bear market is ensuring your holdings survive the economic downturn. There’s little to be gained in buying dirt-cheap companies that ultimately fail to make it through the current challenges caused by coronavirus.
For example, investors may wish to consider aspects of a business such as its debt levels, interest coverage (how many times it can pay interest out of its operating profit), as well as its free cash flow. All of these areas provide guidance on how successfully a business may be able to navigate weak demand. Or, in some industries, a shutdown over the coming weeks.
Through purchasing strong businesses, you may also be able to benefit from their future progress. In other words, the strongest companies in a sector may be able to grab market share more easily. This could enhance their profitability in the long run.
Risk reduction
As well as focusing on the quality of a business, considering the risks facing certain sectors could be a shrewd move. Industries, such as housebuilding, oil and gas and several others, face exceptionally difficult near-term outlooks. Companies operating in those sectors may experience a severe decline in their bottom lines. That makes it much more difficult to deliver share price recoveries over the coming years.
As such, ensuring you have a diverse range of companies from a number of different sectors could be a sound idea. Simply owning multiple stocks from the same industry may leave your portfolio exposed to significant risks that ultimately increases your chances of experiencing lower returns in the long run.
Margin of safety
While most FTSE 100 stocks currently trade on low valuations, some companies are cheaper than others. Therefore, it’s important to continue to seek a margin of safety when buying any stock.
A number of FTSE 100 companies may experience lower earnings growth prospects in the coming years. This may mean their intrinsic values are lower than they were even a few months ago.
Although reassessing their intrinsic values isn’t an easy task, given the uncertain outlook for the world economy, ensuring that there’s a margin of safety in their valuations prior to buying them could be a logical move. That could also increase your returns and helps to bring retirement a step closer.