Due to a number of risks facing the UK and world economies, many investors may be feeling somewhat uncertain regarding the future for the FTSE 100.
This may lead them to consider pivoting from shares to a Cash ISA. This would mean no risk of capital loss, with such investors arguing that there may be a more stable period in future that offers a better time to buy FTSE 100 companies.
This, though, may mean that they miss out on the best buying opportunities that the stock market offers. Its history shows that buying during periods of weakness can be a shrewd move, while the FTSE 100’s growth prospects may be stronger than many investors realise.
Track record of recovery
A quick glance at a long-term FTSE 100 chart shows that the index is cyclical, and that it experiences bear markets fairly regularly. This situation is unlikely to change, and the reality is that a bear market could be ahead.
However, a chart of the FTSE 100 also shows that it has always recovered from its downturns to post higher highs. As such, hindsight suggests that the best times in its 35-year existence to buy shares have been during bear markets. This is where valuations are at their lowest point, and where there is the greatest scope to generate high returns.
Of course, there must be reasons for the FTSE 100 to trade at low levels. At the present time, for example, global trade risks, Brexit and US political risks may be weighing on the index. Any of them could potentially produce a bear market that causes a decline in the index’s price level.
However, the index’s current valuation suggests that investors may have priced in the uncertain future for the world economy. The FTSE 100 currently has a dividend yield in excess of 4%, which is above its long-term average, while many of its members have valuations that are appealing on an absolute and relative basis.
As such, even if the world economy fails to deliver strong growth over the medium term, the index could offer a sound long-term buying opportunity. Its price level may already factor in the potential for a period of economic difficulty.
In the long run, the growth prospects of major economies such as India and China could catalyse the performance of the world economy. Likewise, the US economy is performing well, with a loose monetary policy set to remain in place. This could catalyse its performance, as well as the prospects for the FTSE 100. As an internationally-focused index, it may benefit from the long-term growth of the global economy.
Therefore, while selling shares and avoiding paper losses in the near term through using a Cash ISA may seem to be an appealing strategy right now, it may reduce your chances of obtaining a £1m portfolio.
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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.