The uncertain outlook of the FTSE 100 may convince many investors that now is the right time to seek refuge in a Cash ISA, rather than in large-cap stocks. Risks such as coronavirus, political challenges in the US and the ongoing uncertainty surrounding Brexit could combine to cause a significant amount of volatility for investors in 2020.
However, the worries and fears being felt by many investors at the present time could present long-term buying opportunities. Many FTSE 100 stocks currently trade on highly appealing valuations – especially when their growth prospects are taken into account.
As such, now could be the right time to avoid the low returns available from a Cash ISA and buy FTSE 100 shares with £3,000, or any other amount.
While the FTSE 100 could move lower if the aforementioned risks increase in size, in many cases its members’ valuations incorporate wide margins of safety that factor in the prospect of a challenging outlook. This could present numerous buying opportunities for investors who have a long-term outlook, since they may be able to purchase high-quality stocks while they trade at discounts to their intrinsic values.
The track record of the FTSE 100 shows that it has always been able to stage a successful recovery from its downturns. For example, it halved during the global financial crisis, and yet has traded at a record high within the past few years. In fact, since its inception 36 years ago, the index has recorded an annualised total return of 9%, despite experiencing numerous recessions, bear markets and major economic challenges that, at the time, caused many investors to seek lower-risk assets.
Therefore, even if there are more challenging months ahead this year, long-term investors are likely to benefit from the bright growth potential which major economies such as the US and China may face over the coming years. As such, buying stocks while other investors are seeking to reduce their portfolio risk could be a shrewd move.
A challenging future
By contrast, holding cash could continue to be a difficult experience over the coming years. There are currently little, if any, signs that a prolonged period of interest rate rises is ahead in the UK. In fact, two of the Bank of England’s Monetary Policy Committee members voted for an interest rate cut in the most recent meeting, with their colleagues determining that interest rates should be held close to their record low.
With inflation being below the Bank of England’s target and the economic prospects being opaque due in part to Brexit, low interest rates could remain in place over the medium term. In such a scenario, investing in the FTSE 100 could offer a significantly higher rate of return which improves your financial situation to a larger extent than having a Cash ISA.
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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.