Investing £5k (or any other amount) in FTSE 100 shares may seem to be a high-risk decision following the index’s 20% fall. Risks such as coronavirus, an oil price war and Brexit may mean that there’s a relatively high level of volatility ahead for the index.
However, you may be able to capitalise on the index’s low valuation. Do this by focusing on companies with solid balance sheets, sound growth strategies, and exposure to favourable markets. This could improve your long-term financial prospects. That is especially through a tax-efficient account such as a Stocks and Shares ISA.
Risks ahead
The uncertain outlook for the world economy could mean the FTSE 100 experiences further declines in the short run. It’s currently impossible to quantify the extent of the impact caused by the spread of coronavirus. This may mean investors factor-in a worst-case scenario. This leads to even lower valuations than those currently on offer throughout the index.
In addition, the actions of oil producers is a known unknown. A falling oil price may cause financial challenges beyond the resources sector. Defaults on loans have the potential to cause losses in the banking sector, for example. Therefore, investors could become more cautious about the prospects for global equities. This may result in a lower price level for the FTSE 100.
Long-term growth potential
While investing in FTSE 100 shares today may produce paper losses in the short run, it could deliver high returns in the long run. A great number of large-cap shares currently have low valuations, with their yields above long-term averages and their price-to-earnings (P/E) ratios considerably lower than historic ranges, in some cases.
Therefore, investors may wish to capitalise on lowly-priced stocks at the present time. In addition, focusing on companies with low debt levels, strong free cash flow and business models that can survive the current difficulties facing the world economy could be a worthwhile move. They may be less risky than their index peers, and may even be able to increase market share at a time when trading conditions are especially tough.
Sectors which could offer long-term growth potential, such as healthcare, online retail and technology, may now be attractively valued. Therefore, buying a diverse range of companies with strong fundamentals and growth potential could be a means of improving your long-term financial prospects.
Bear market management
Perhaps one of the most difficult aspects of investing following a market crash is managing your emotions. It’s easy to become concerned about the performance of your Stocks and Shares ISA when its value is declining.
However, by investing in attractive businesses and taking a long-term view, you can take advantage of the stock market’s cyclicality. It could offer a high return on your initial investment, and improve your financial future.
