Buying FTSE 100 shares in a Stocks and Shares ISA could prove to be a risky move in the coming months. Investor sentiment may prove to be highly changeable. And it could worsen if news flow regarding coronavirus is downbeat.
Furthermore, the economic recovery from this unprecedented amount of disruption to a wide range of industries may take some time. As such, adopting a long-term view of the FTSE 100’s performance may be more important than ever.
But investors should take a long-term view. The FTSE 100’s current price level suggests that buying stocks in an ISA right now could be a very worthwhile move in the coming years.
Valuations
The FTSE 100 currently trades at a similar level as it did in the late 1990s. Furthermore, many of its members have valuations significantly below their long-term averages. This could indicate that the index offers a wide margin of safety. And that is something that does not happen often. In fact, its recent price levels are only generally recorded during bear markets. These themselves are infrequent, albeit repeat, events.
Therefore, investors may have an opportunity to buy high-quality stocks while they trade at attractive prices. Historically, buying such companies while they are priced at low levels has been a sound means of generating high returns. Bull markets and bear markets have, after all, always followed each other. Buying stocks today could enable you to take part in the highly likely recovery. It may not seem so now, but this is expected to follow the current challenges facing the world economy.
Risks
One advantage of buying FTSE 100 shares, rather than smaller companies, in an economic crisis is that they are generally less risky. For example, FTSE 100 companies are larger, often have a more diverse range of operations, and may have stronger balance sheets than their smaller peers.
This not only increases their chances of survival during a recession, it also provides them with the potential to win market share from smaller competitors. True, the FTSE 100 is sometimes viewed as an index lacking growth appeal. But its present risk/reward ratio may prove to be very attractive for investors who wish to capitalise on the current bear market.
Reward potential
In terms of the rewards on offer from the FTSE 100, its past performance since inception has been relatively impressive. Even after its recent fall, it has recorded an annualised capital return in excess of 4.5% since its birth in 1984. When dividends are added, this is an impressive total return that is significantly ahead of other mainstream assets.
Therefore, now could be the right time to buy a diverse range of FTSE 100 stocks in an ISA. They may not produce high returns in the short run, but could deliver attractive total returns in the long term.
