The FTSE 100’s recent decline may mean that some investors consider purchasing other mainstream assets. Cash ISAs and Premium Bonds, for example, may offer lower risks in the short run. Similarly, buy-to-let investments may appear to be more resilient than a crashing stock market.
However, over the long run the FTSE 100 may produce significantly higher returns than other mainstream assets. As such, now could be the right time to build a diverse portfolio of large-cap shares, and hold them in the coming years.
Relative appeal
The recent decline in interest rates is set to cause the returns on Cash ISAs and Premium Bonds to decline. They are now unlikely to match inflation over the next few years. While this may not appear to be a problem in the short run, a loss of spending power may mean that your financial future is negatively impacted. This may make it more difficult to build a retirement nest egg, for example.
Likewise, investing in buy-to-let properties may not be as profitable as it has been in the past. Coronavirus looks set to have a significant and potentially prolonged impact on the performance of the wider economy. This may lead to houses becoming unaffordable for many people, which causes house price growth to moderate. Furthermore, tax changes to second homes may mean that buy-to-let returns are relatively disappointing on a net basis.
Return appeal
As such, buying FTSE 100 shares could be a sound move. They may display substantially greater levels of volatility than other mainstream assets. But, for long-term investors who are not seeking to profit in the short run, now could prove to be an opportune moment to capitalise on the index’s low valuation.
For example, the FTSE 100 currently has a dividend yield of around 6%. Although there is the prospect of dividend cuts among many of the index’s members, the reality is that many FTSE 100 companies have dividends that are highly affordable. They may not need to reduce shareholder payouts, or if they do, it could prove to be over a very limited time period. Therefore, the FTSE 100’s valuation could end up being highly attractive at the present time.
Risk management
Of course, many individuals may be uncertain about the outlook for the FTSE 100. The index has, after all, fallen by as much as 35% in a matter of weeks. In such an environment, assets such as Cash ISAs, Premium Bonds and buy-to-let properties may seem to be more attractive.
But over the long run, the index has recovery potential. Its track record shows that investors who buy when the index is cheap and hold on to their stocks throughout bear markets generally produce high returns. Adopting such a strategy could, therefore, prove to be a worthwhile move at the present time.
