The FTSE 100’s crash may cause alarm among some investors seeking to build a retirement nest egg. After all, its 20%+ decline means it’s now in a bear market. And, with the spread of coronavirus a known unknown, things could realistically get worse before they improve.
However, depressed share prices could prove to be an opportunity to boost your retirement prospects. They may enable you to generate higher returns in the long run that improve your chances of retiring early.
As such, now could be the right time to start buying FTSE 100 shares instead of avoiding them.
Many who are aiming to build a sizeable retirement nest egg are likely to have a long-term time horizon. As such, while the short-term performance of their portfolio may be causing a degree of worry, ultimately it’s the size of their portfolio in the long run which matters.
Therefore, the FTSE 100’s performance in the coming months may prove to be a buying opportunity. Even if you purchase stocks today and they fall by another 20% in the coming months, they have the potential to deliver high returns in the long run.
Many of the FTSE 100’s members currently have exceptionally low valuations and high yields. They could combine to produce strong total returns which increase the size of your portfolio. And, of course, enable you to obtain a higher passive income in retirement.
During any market crash, it’s easy to doubt the recovery potential of the stock market. It was a similar situation in the 1987 crash, the tech bubble, and the financial crisis. At times, it felt as though a recovery was a very distant prospect.
However, the FTSE 100 recovered on each of those occasions. Although it took years in some cases, a retirement portfolio is likely to have a long-term time horizon. Therefore, there’s likely to be sufficient time for you to benefit from a subsequent recovery in the FTSE 100’s price level.
Certainly, there’s no guarantee the FTSE 100 will recover from its recent downturn. But it has always done so in the past, which suggests it’s a likely scenario over the long run.
As well as buying shares while they trade on low valuations, and holding them for the long term, diversification could aid your retirement prospects. It can help to reduce the risks of your overall portfolio through spreading your capital across a variety of industries and geographies. It may also improve your returns, since you’re able to access strong growth rates in a number of different areas.
With the FTSE 100 offering recovery potential and low valuations, now could be the right time to focus on the long run and purchase a diverse range of large-cap shares.
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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.