The FTSE 100’s recent market crash may lead some investors to buy less risky assets, such as gold. The precious metal has traded at a seven-year high in 2020, as its defensive characteristics and history as a store of wealth have proved popular among investors.
However, now may be the right time to buy undervalued FTSE 100 dividend shares. The index’s cyclicality means that buying while share prices are low may improve your prospects of retiring early.
Cyclicality
The FTSE 100 is no different than any other asset when it comes to being cyclical. In other words, it experiences booms and busts. At the present time, it’s experiencing the latter following a decade-long bull market which produced a strong recovery after the financial crisis.
The current bear market may last for a period of a few more days to many more months. Indeed, it could take the FTSE 100 a number of years to fully recovery from its recent decline.
However, its track record shows it has always been able to overcome its previous bear markets to post new record highs. Although a recovery may seem unlikely at present, due in part to the challenging news flow surrounding coronavirus, in the long run the FTSE 100 is likely to post higher highs than in the past.
Buying opportunity
Therefore, now could be the right time to buy stocks. They offer excellent value for money in many cases, with the FTSE 100’s dividend yield currently standing at around 6%. This is its highest ever level and, while there could be dividend cuts ahead, many of the index’s members appear to have highly affordable dividends. This may make them less likely to reduce or postpone their shareholder payouts.
Furthermore, buying dividend shares could be a good idea because they may become increasingly popular among investors. Low interest rates mean income-producing assets, such as cash savings and bonds, are relatively unattractive. Investors may, therefore, focus their capital on dividend stocks in the coming years.
Dividend shares could also be worth buying even if you’re not seeking to obtain a passive income from your portfolio today. Historically, a large portion of the FTSE 100’s returns have been derived from the reinvestment of dividends. Therefore, income shares could help you to build a retirement nest egg from which to draw a growing passive income in older age.
Gold’s appeal
In the short run, gold could outperform the FTSE 100. If the current economic challenges persist, investors may prefer less risky assets over equities. But, for any investor with a long time horizon, buying FTSE 100 shares today could prove to be a sound move.
It may improve your chances of retiring early, and boost your prospects of enjoying a growing income in retirement.
