The FTSE 100’s track record highlights its potential to generate high returns for long-term investors. For example, its historic annualised total return of 8% since inception in January 1984 would mean that it takes around 30 years to turn £100k into £1m.
However, through focusing your capital on undervalued businesses with solid financial positions and dividend growth prospects, it is possible to achieve a higher return. This could improve your portfolio’s growth rate, and increase your chances of making a million.
FTSE 100 bargains
Buying undervalued FTSE 100 shares could be a means of boosting your total returns. The index has a long track record of experiencing booms and busts, which suggests that buying shares during the latter can be a means of experiencing higher capital growth rates.
At the present time, a wide range of large-cap shares appear to offer good value for money. Investor sentiment towards many sectors, such as resources, financial services and retail, is relatively weak. This situation may persist in the short run due to the ongoing economic difficulties that are likely to continue over the coming months. However, with major stimulus packages having been announced, the long-term outlook for asset prices could be more positive than current valuations suggest.
Financial strength
Of course, buying undervalued FTSE 100 shares is unlikely to make you a million if they do not survive the challenging operating conditions faced in the short run. As such, it is imperative to focus your capital on those businesses that have a high chance of surviving what could be one of the most severe recessions for many years.
Through assessing a company’s balance sheet strength, its cash flow and access to liquidity, it may be possible to build a picture regarding its capacity to emerge from the current crisis in a relatively strong position. Doing so may enable you to buy the companies with the greatest long-term growth potential as the economy recovers.
Diversification
It may be too soon to know which FTSE 100 sectors will deliver the strongest returns over the long run. For example, some sectors may be more deeply affected by coronavirus and the subsequent lockdown than others. This may entail that some companies can return to normality sooner than others, with major business model changes not necessarily required in some industries in response to changing consumer demands.
Therefore, it is prudent to maintain a diverse spread of industries and businesses within your portfolio over the coming years. This strategy may enable you to reduce your reliance on a small number of companies for your returns, while allowing you to access a wider range of businesses from which to generate high returns. As such, it could improve your overall financial prospects and increase your chances of making a million.