Because of the high level of choppiness in broader markets, many market participants have recently chosen to stay on the sidelines. We do not yet have a full end to the economic and health uncertainty brought on by the Covid-19 pandemic. Volatility can feel unnerving, especially if you are just getting started in investing in FTSE 100 shares.
It is anyone’s guess what stocks may do in the coming weeks. Yet I believe the recent market crash, as well as any potential further declines, may create an opportunity, especially for long-term investors who may want to grow a nest egg to retire wealthy. History tells us that eventually economic slumps end and robust FTSE 100 shares go on to make new highs.
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Therefore, I’d like to discuss two reasons why I believe new investors may want to review their long-term financial goals. The first reason is low interest rates. The second reason is that time is always on the side of the long-term investor. Let’s see how.
Low interest rates may support FTSE 100 shares
Both in the UK and many countries worldwide, interest rates are at all-time lows. The Bank of England (BoE) website details the progressive decline of interest rates over several decades. As you can see, 0.1% is historically low.
Interest rates have an important effect on economic activity, the cost of borrowing, capital flows and retirement planning. According to legendary investor Warren Buffett, if rates and taxes stay low, stocks will likely beat bonds long term.
You may regard buying bonds or keeping your money in cash as technically risk-free. However, that would mean free from downside risk. Yet, the risk of inflation potentially renders today’s pounds significantly less valuable in the long run.
Many analysts would agree with Mr Buffett that with interest rates as low as they are, taking a raincheck on regular investing in FTSE 100 shares may indeed come with high opportunity costs. Historical data from our economy shows that low rates have bolstered stock prices over time.
On top of that capital growth, robust dividends on offer by many FTSE 100 shares could be a good option for income investors. In 2019, the average dividend yield for the FTSE 100 was about 4.5%.
Time is on your side
If you want to retire wealthy, it is important to appreciate how your money could grow with compound interest over time to a surprisingly large amount.
Let’s assume that you are now 30, with £5,000 in savings and that you plan to retire at age 65.
You decide to invest that £5,000 in a fund now and make an additional £4,000 of contributions annually at the start of the year. You have 35 years to invest. The annual return is 6%, compounded once a year. At the end of 35 years, the total amount saved becomes £510,914.
Saving £4,000 a year would mean being able to put aside around £333 a month or about £11 a day. Might you just be wondering if you should skip that next impulse purchase or cup of coffee?
And if you were to increase the amount of annual contributions from £4,000 to £6,000, the total amount saved becomes £747,155. That would be the power of time and compound interest at work together.
Making the right decisions in stock market investing is not necessarily about constantly picking winning shares and funds. Rather it is about having a long-term strategy.