The FTSE 100 crash has been scary. There is so much uncertainty because of the Covid-19 lockdown and its social and economic impact. That is added to the uncertainty that we have already lived with, of Brexit negotiations and other geopolitical tensions.
But there is an upside to the crash at least. If you have some cash set aside, say £10,000 or so, and invest like Warren Buffett, you could increase your chances of retiring early.
Best long-term investments for beginners
I have just listened to Buffett’s interview about the power of indexing. Investing $114 into the S&P 500 Index in 1942 – just after Pearl Harbour – would have left an investor with $400,000 by 2019. Of course, back in 1942, $114 was worth much more than it is today. The point is that the return of the S&P 500 Index averaged 10% per year.
And how about FTSE 100? Well, as my colleagues point out, the annual return of the index is 6% to 8% per year on average. Reinvesting the dividends would also do a good job for you, especially during bear markets.
FTSE 100 recovery
The problem is that most people start panicking when they see their portfolios crashing. So, instead of adding to their holdings, they keep selling. I would not do this, especially in the case of an index fund. The Footsie has a great recovery history. It recovered after the Great Recession of 2008–09. And it is highly likely it will do the same now after the lockdown.
The same is also true for its core constituents. Well established, profitable companies with investment-grade credit ratings have the potential to make you a fortune.
You don’t have to have a lot of cash at your disposal to start investing now. And you don’t need to invest all your cash at once. You can just buy a bit of a stock index and some of the best shares with a part of that money. Then, you could reinvest the dividends and add to your positions during corrections or at fixed intervals, say, once per month.
Best stocks to retire early
The most important question is which stocks to pick. Obviously, “good” stock picks tend to outperform the entire FTSE 100. This is because an index also includes loss-making and risky companies. Nowadays, risky companies include Carnival Corporation and InterContinental Hotels Group. They currently drag the index down. But will it always be so? If these companies don’t go bankrupt before the end of the lockdown, they could turn out to be an excellent bet for brave long-term investors. Unfortunately, no one knows if that will be the case.
However, for other stock pickers it might be wise to avoid such companies and stockpile the “good” ones. What does it mean? Well, such companies are currently profitable. They also pay dividends and have high credit ratings. Some investors like to buy momentum stocks like Ocado. This means that they are generating high returns and will continue to do so for a few months.
I prefer to invest for the long run in companies with a long history. I like companies like Legal & General, Aviva, and Barclays. They belong to the financial sector, which tends to struggle during recessions. But when the dust settles, they will flourish.
These are just some of my suggestions, but there are many more companies that can turn £10,000 into a fortune and allow investors to retire early.
