While today may not seem to be the right time to invest in the FTSE 100, there is never a ‘perfect’ time to buy shares.
The main reason for this is that there are always risks facing investors. At the present time they include Brexit, a trade war between the US and China, as well as geopolitical risks in the Middle East.
All of those risks could lead to a difficult period for the world economy that ultimately causes a bear market for the FTSE 100.
However, over the long run, the stock market has historically offered much higher returns than cash. As such, now could be the right time to stop saving and start investing in FTSE 100 growth stocks.
Returns despite risks
With the FTSE 100 having started life at 1,000 points in January 1984, its rise to the current level of around 7,400 points means that it has recorded an annualised growth rate of 5.8%. When its dividend yield is added to this figure, the index’s total return since inception has been in the high single-digits.
Of course, its performance over the last 35.5 years has been hugely unpredictable and volatile at times. It has had to contend with challenges such as the crash of the late 1980s, the dotcom bubble bursting in the early 2000s and the financial crisis of 2007-09. During all three of these bear markets, the index lost a large proportion of its prior gains. However, in all three cases (and in every bear market it has ever experienced), the index has recovered to post higher highs.
Clearly, the best outcome for an investor would have been to avoid every bear market through selling shares at their high. They could then have subsequently repurchased them at a lower level in order to maximise their profit over the long run.
The problem, though, is that identifying when a bear market will start is incredibly challenging. As mentioned, there are always risks facing the world economy that could lead to a downturn for the FTSE 100. As a result, an investor may sit on the sidelines in anticipation of lower share prices, only for the index to rise to record highs. In such a situation, they would be left with a return on their cash of 1.5%, while the FTSE 100 may be delivering significantly higher returns.
Time in the market
Therefore, it may be prudent to invest regularly in a range of FTSE 100 stocks in order to access the long-term growth potential that they offer. It could also be worth having some cash on hand in case opportunities present themselves, for example a bear market may lead to lower share prices for high-quality companies.
But to continually save money without investing it due to short-term risks being present may mean that an investor ultimately misses out on the returns available in the stock market. And, as the FTSE 100 has shown in the last 35.5 years, they could be highly appealing.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.