Buying FTSE 100 stocks after the index’s recent crash may not seem like a sensible route to making a million at first glance. After all, the economic impact of coronavirus is a known unknown. And the performance of the stock market could continue to be disappointing in the coming months.
However, long-term investors may be able to buy high-quality companies while they trade at low prices. Adopting a similar strategy in past bear markets has produced high returns for many investors. As such, now could be the right time to invest in large-cap shares. And it could increase your chances of generating a seven-figure portfolio.
Undervalued businesses
Coronavirus is undoubtedly going to have a significant negative impact on the world economy. A large proportion of the world’s population is under lockdown measures. So companies operating in a wide range of industries are set to experience a sudden decline in revenue and profits in 2020.
However, some companies are not experiencing material financial impacts from coronavirus. Yet their share prices have declined nonetheless. Why is that? It is because investor sentiment towards the wider stock market has deteriorated. As such, investors may be able to buy resilient businesses with defensive characteristics at discount prices.
Even those companies that are experiencing lower sales in the short run due to coronavirus could be undervalued. In many cases they have solid balance sheets and wide economic moats that may enable them to overcome the risks that are currently facing the world economy. Buying them now when they offer a wide margin of safety may not yield high returns in the short run. But over the long run they appear to offer recovery potential.
Relative appeal
At the present time, investors have a limited choice of where they can invest to generate high long-term returns. Assets such as cash and bonds certainly lack appeal. This is due to low interest rates causing their return prospects to be below inflation in many cases. This may lead to a loss of spending power over the long run that hurts your financial outlook. Likewise, tax changes and lockdown measures mean that the appeal of buy-to-let properties has declined compared to what it was a number of years ago.
As such, on a relative basis, the FTSE 100 could offer significant long-term investing potential. Its track record of recovery suggests that even though the recent market crash has been challenging for investors, and may yet continue over the coming months, a successful turnaround is likely for a large proportion of the FTSE 100’s members.
Investors who are able to buy a diverse range of FTSE 100 shares may be able to capitalise on their low valuations to generate high returns. This process may take time, but could improve your prospects of building a portfolio that is valued at over £1m in the coming years.