Investing £10k, or any other amount, in FTSE 100 shares today may seem like a high-risk decision. The index faces a hugely uncertain period, due to risks such as a weak economic outlook that’s likely to be present over the coming months.
However, for investors with a long-term time horizon there’s likely to be sufficient time for the index to make a full recovery after its recent crash. By investing in a diverse range of businesses with strong track records of profit growth while they trade at low prices, you could increase your chances of retiring early.
Strong track records
Many FTSE 100 companies are likely to experience challenging trading conditions over the coming months. So it may be prudent to invest in those businesses that have solid track records of delivering profit growth in a variety of operating environments.
They may, for example, have been able to successfully generate rising top and bottom lines during the last major recession in 2008/09. Or they could have defensive characteristics that help them to overcome the difficulties faced at present.
Through buying companies with strong track records, you may be able to reduce your risks in the short run. You may also increase your chances of owning those businesses likely to continue to operate over the long run, despite economic risks. They may also be capable of expanding their market share to earn higher returns, in some cases.
Diversification
It’s currently unclear which economies and which sectors will perform relatively well in the medium term. For example, economies that have been less affected by coronavirus and haven’t required full-scale lockdowns may be among the first to successfully emerge from the current crisis. Likewise, some industries may produce stronger recoveries than others. Particularly those more capable of adapting to changing consumer tastes.
By purchasing a range of FTSE 100 companies, you can obtain a significant amount of diversification within your portfolio. This may reduce your risks, since you’ll be less reliant on a small number of sectors and regions for your returns. It may also enhance your portfolio’s growth prospects over the long run as the world economy gradually recovers.
Low FTSE 100 valuations
The FTSE 100 may have rebounded over recent weeks, but it continues to trade around 20% below its starting price in 2020. This suggests it offers good value for money, and that investors have factored in many of the risks facing the index.
With the index having a strong track record of recovery, buying undervalued stocks today could be a shrewd move. They may offer the greatest scope for capital returns. As such, focusing your capital on the most undervalued companies within the index could be a sound means of investing today to improve your prospects of retiring early.
