Buying bargain FTSE 100 shares today may not seem to be a sound means of becoming an ISA millionaire in the eyes of some investors. After all, the index is trading around 17% down on its level from the start of 2020 and faces numerous risks that could derail its recent recovery.
However, the track record of the stock market’s performance shows that buying undervalued shares and holding them for the long run has generally been a shrewd move. Doing so could boost your returns and increase your chances of making a million.
Bargain FTSE 100 shares
Buying FTSE 100 shares while they are undervalued can increase your returns over the long run. A key reason for this is that they include a wide margin of safety, with investors factoring-in risks to their near-term performance. For example, at the present time many large-cap shares appear to offer good value for money due to ongoing risks such as the potential for a second wave of coronavirus.
Wide margins of safety enable you to buy high-quality businesses for considerably less than they are worth. As investor sentiment and the economy’s performance gradually improve, which they always have done following bear markets, the valuations of bargain shares can rise rapidly. Therefore, buying a range of undervalued shares today could lead to high returns in the coming years.
Growth potential
The FTSE 100’s performance may be volatile in the short run, but it is very likely to enjoy a sustained bull market in the long run. Significant policy developments over the last few months mean that the economy’s growth rate could pick up quickly after lockdown measures end.
For example, the Bank of England and other central banks across the world have put in place unprecedented policy action to stimulate the economy. This includes historically-low interest rates and vast amounts of asset purchases. Together, they have the potential to boost economic growth over the medium term, just as they did following the global financial crisis over a decade ago.
Therefore, many stocks could experience improving operating conditions that enable them to pay higher dividends, become more confident about their prospects and enjoy improving investor sentiment.
Alternative opportunities
Making a million from FTSE 100 shares appears to be a more likely prospect that relying on other assets at the present time. Buy-to-let investments may be inaccessible for many investors due to difficulties in obtaining finance, while other assets such as cash and bonds are likely to produce paltry returns due to continued low interest rates.
Therefore, the risk/reward opportunity offered by large-cap shares could be highly appealing on a relative basis. They have the potential to deliver impressive returns that increase the chances of you obtaining an ISA that is valued at over £1m in the long run.
