Individuals with £5k available to invest today may shun FTSE 100 shares in favour of lower-risk assets such as a Cash ISA due to the uncertain economic outlook.
However, investing in undervalued shares could be a sound means of generating high returns that enables you to enjoy an earlier retirement.
Undervalued businesses may be well placed to benefit from a likely economic recovery that could catalyse your ISA’s performance in the coming years.
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Bargain FTSE 100 shares
Buying bargain FTSE 100 shares today could enable you to benefit from the stock market’s likely long-term recovery. The track record of equity markets shows that they have always experienced periods of disappointment and decline. However, those periods have never lasted in perpetuity. As such, purchasing stocks while they are cheap could be a means of obtaining wide margins of safety that can produce relatively high returns over the long run.
Of course, simply buying cheap shares may be an insufficient means of generating high returns in the coming years. Some companies may be trading at low prices because of weak financial positions or highly challenging trading prospects. This could mean that they fail to survive a period of economic weakness.
As such, it is important to assess the quality of FTSE 100 shares, as well as their price, before buying them. This could help you to avoid weaker businesses that may fail to fully recover lost ground over recent months, and to focus your capital on those companies that offer the best mix of quality and low prices at the present time.
Relative appeal
Undervalued FTSE 100 shares could produce significantly higher returns than other assets over the coming years. For example, Cash ISAs may struggle to deliver positive returns after inflation is factored-in. Low interest rates may remain in place for a significant amount of time, as policymakers seek to support the economy’s recovery. This could mean that your spending power fails to improve from holding cash, which will not aid you in your aim to retire early.
Poor return prospects for other assets may mean that demand for shares increases. This could help to push stock prices higher, as investors gradually shift their focus towards obtaining an attractive return from their capital as an economic recovery takes hold. Therefore, the prospect of a recovery for the FTSE 100 could be relatively strong, and may gain momentum as investor sentiment improves.
Starting today
Although buying FTSE 100 shares today may be a tough decision for investors due to the risks it faces at the present time, doing so could improve your long-term financial prospects. Many attractive large-cap shares with solid financial positions appear to be undervalued at the present time. The stock market’s track record suggests that buying them now is likely to produce high returns as equity markets gradually recover from the recent market crash.
