Investing in FTSE 100 shares today may not lead to a high return over the short run. The index faces risks, such as a likely recession and the prospect of further lockdown measures, should there be a spike in coronavirus cases.
However, many of its members appear to offer wide margins of safety that take into account the risks they face. Through buying a diverse range of financially-sound businesses with £2k, or any other amount, you could be well placed to benefit from the index’s likely long-term recovery.
A known unknown
The future shape of the economy is always a known unknown. However, the outlook for a wide range of FTSE 100 sectors, such as retailers and travel & leisure companies, is arguably more uncertain than it has been for a number of years.
Therefore, investing in financially-sound businesses that have the resources to adapt to a changing economy may be a worthwhile move. Such companies may, for example, have the capacity to raise capital more easily than their peers to invest in new growth areas. They may also be under less pressure to service debt in the short run. That would provide them with the breathing space required to adapt their business models to a changing world.
Financially-sound businesses with low debt levels may also be better able to withstand further lockdowns compared to their weaker peers. Therefore, investing in stronger businesses may lower your risk, as well as boost your returns over the long run.
FTSE 100 diversification
Due to the uncertain economic outlook, it’s difficult to know which sectors will deliver the strongest returns for investors. As such, diversifying when investing your capital could become increasingly important to manage risk effectively.
Clearly, diversification is more challenging when you have a limited amount of capital. Smaller investors may wish to buy FTSE 100 index tracker funds to obtain exposure to a wide range of businesses before buying individual companies as their portfolio grows in size.
However, with the cost of buying shares having fallen dramatically over the past couple of decades, diversification is likely to be an accessible goal for most investors. It could prove to be even more beneficial than usual given the uncertainty facing the economy as lockdown measures abate.
Margin of safety
Due to the prospect of a weak economic outlook, obtaining a wide margin of safety could be crucial when investing at the present time. This reduces your risk should they experience weak investor sentiment or more challenging operating conditions, and may improve your reward prospects.
With many FTSE 100 shares currently trading on low valuations, there’s a large amount of choice for long-term investors. Although there may be difficulties ahead for the index, the likely stock market recovery could boost your financial prospects after the market crash.