The FTSE 100’s stock market crash may have caused some investors to focus their attention on less risky assets until the prospects for the economy improve. While this may prevent paper losses in the short run, it means that you could avoid the most attractive buying opportunities on offer.
The index has a solid track record of overcoming its risks to post new record highs. Therefore, now could be the right time for long-term investors to start purchasing high-quality companies in an ISA to benefit from the low prices on offer after the market crash.
Risk/return trade-offs
The FTSE 100 faces a number of risks that could derail its progress in the near term. For example, challenges such as the potential for a rise in coronavirus cases could inhibit the prospect of an economic recovery. This may weigh on valuations across the index over the coming months.
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Other assets such as cash and bonds may not face such risks, and could offer a more certain return profile. However, their returns may prove to be disappointing in any case. Low interest rates mean that bond yields are at relative lows, and savings accounts offer interest rates that are lower than inflation in many cases.
As such, although avoiding FTSE 100 shares in favour of other less-risky mainstream assets may lead to lower risks, it may also produce significantly weaker returns in the coming years.
FTSE 100 opportunities
The FTSE 100’s past performance highlights the cyclicality of the index. It has continually switched from periods of growth to periods of decline, and back again. This trend is unlikely to end, since the economy and investor sentiment is continually switching between positive and negative periods.
Investors who are able to invest during periods of decline, and hold shares through periods of growth, are likely to generate the highest returns. They can access lower share prices, and benefit from their subsequent rise.
Therefore, with many FTSE 100 shares trading on low valuations at the present time, it could be an opportunity to buy stocks while they offer significant recovery potential. Doing so may produce paper losses in the short run, but the index’s track record suggests that they will be replaced by large gains over the coming years as the prospects for the world economy improve.
Stocks and Shares ISA
A Stocks and Shares ISA is a simple, cost-effective and tax-efficient means of generating high returns from the FTSE 100. It can be opened by anyone online in a matter of minutes, and its low costs make it accessible to all investors.
With the index continuing to trade significantly down on its previous highs, there seem to be plenty of opportunities for long-term investors to position their portfolios for a likely recovery over the coming years.
