Starting to invest for retirement after the FTSE 100’s market crash may not seem to be a sound move. The index could, for example, experience a further decline in its price level in the short run, as risks of a second wave of coronavirus later in the year are likely to persist.
However, investors with a long-term time horizon could benefit from the index’s likely turnaround prospects. As such, now could be the perfect time to open a Stocks and Shares ISA and start buying cheap FTSE 100 shares to improve your prospects of retiring early.
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FTSE 100 return potential
Even though the FTSE 100 faces an uncertain future, its long track record of returns suggests that it has recovery potential. Since its inception in 1984 the index has experienced numerous crashes, corrections and periods of high volatility that have, at times, caused it to lose over 50% of its value in a matter of months.
Despite those challenging periods, the index has risen more than six-fold since inception. When dividends are included, its total returns are in excess of 8% per annum. At a time when interest rates are low and the prospects for buy-to-let investors are uncertain, buying FTSE 100 stocks and holding them could be the simplest means of building a retirement nest egg that provides a passive income in older age.
The FTSE 100’s rebound since March means that many of its members no longer trade at their lowest price levels since the financial crisis. However, in many cases they continue to offer wide margins of safety. Historically, buying stocks when they trade at low prices has been a successful means of generating higher returns over the long run. They have greater scope to deliver gains, and are likely to benefit from the index’s recovery potential.
In some cases, stocks will be cheap for good reason. They may, for example, have a low chance of surviving a likely recession in 2020. However in other cases, companies are trading at low prices because of weak investor sentiment towards the FTSE 100. This could create buying opportunities for investors who can go against the views of their peers and buy a diverse range of high-quality businesses for the long term.
Stocks and Shares ISA
A simple and cost-effective means of capitalising on cheap FTSE 100 shares is through a Stocks and Shares ISA. It can save you a significant sum of money in tax over the long run, since investments made within it are not subject to capital gains tax or dividend tax.
Clearly, investors who start buying FTSE 100 stocks today should not expect high returns in the short run. But after the challenges of the market crash gradually subside, they are likely to give way to a market recovery that could help you to retire early.