Buying FTSE 100 shares today could be a worthwhile means of improving your retirement prospects. The index appears to offer good value for money, while its track record of growth suggests it could catalyse your retirement portfolio so it produces a passive income in older age.
Certainly, the index faces a number of risks which could cause a difficult short-term outlook. But with other mainstream assets having their own challenges, and the index having always recovered from its downturns, it could offer the potential to help you beat what is a rather disappointing State Pension.
As with any asset, purchasing FTSE 100 shares while they offer good value for money could lead to higher returns in the long run. The index currently has a dividend yield that’s above 4%. This is higher than its long-term average, and suggests the index offers a margin of safety.
Additionally, many of its members trade on lower ratings than their historic averages. Investors appear to have factored in a number of risks facing the UK and the world economy. This could mean it’s possible to buy a range of large-cap shares which offer solid balance sheets and strong cash flow at attractive prices. History has shown that adopting this strategy can lead to high returns in the long run that increases the size of your retirement nest egg.
The FTSE 100 is often viewed as a relatively slow-moving index in terms of its growth rate. Many investors focus on the FTSE 250, or even smaller companies, to generate growth, since larger stocks are sometimes viewed as finding it more difficult to generate growth compared to their smaller peers.
However, the track record of the FTSE 100’s performance suggests it can deliver high capital returns. For example, it’s risen more than seven-fold since inception in 1984. This equates to an annualised capital growth rate of almost 6%. When dividends are added to that figure, its total returns are around 9%, which shows an investment in large-cap shares can deliver surprisingly high returns in the long run.
Low interest rates mean that the returns on cash and bonds are relatively low. In some cases, they are below the rate of inflation. Property investment may also be unattractive, since increased taxes and recent house price growth could cause returns to be somewhat limited in the coming years compared to their historic levels.
Therefore, investors who are aiming to build a retirement portfolio from scratch may be better off purchasing a range of FTSE 100 shares. They appear to offer better value for money and higher returns than other major asset categories, while their growth potential could enable you to beat the State Pension and enjoy financial freedom in older age.
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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.