The FTSE 100’s 33% decline since the start of the year has caused fear and worry among many investors. That’s completely understandable, since losing money is always a difficult process.
However, the index has experienced severe declines and bear markets before. It has always recovered from them, and there is a high chance it will do likewise following its current woes.
Therefore, now could be the right time to focus on buying shares, rather than selling them. Doing so could enhance your financial prospects in the coming years.
A stock market crash is a fairly regular occurrence. Although it has been over a decade since the last bear market, there have been multiple occasions since the FTSE 100’s inception in 1984 when the index has declined by more than 20% from its peak.
For example, it experienced severe losses in 1987 and then again in the tech bubble. Following that, the financial crisis wiped around 50% from its value, and it is currently down a third due to the impact of coronavirus on the world economy’s outlook.
However, it has always recovered from its previous bear markets to post new record highs. Eventually, the prospects for the world economy have always improved, and investors have responded by purchasing shares at rising prices. While the same outcome may seem unlikely right now, history suggests that it is only a matter of time before the FTSE 100 recovers.
Most investors are usually net buyers of companies. In other words, they buy more stocks than they sell. As such, lower share prices could prove to be a good thing for investors if they have a long-term outlook. They will be able to buy high-quality businesses at lower prices and benefit from their potential recovery over the following years.
Therefore, bear markets such as the one currently being seen could prove to be a good thing for long-term investors. History shows that investor sentiment can weaken substantially while the outlook for the world economy is deteriorating. But through buying stocks while they offer high dividend yields and low valuations, they may be able to capitalise on the cyclicality of the index.
Purchasing shares today could mean there are paper losses ahead in the short run. After all, it is exceptionally difficult to successfully identify the precise time when the FTSE 100’s performance will improve. For example, it depends on the spread of coronavirus and how successful governments are at containing it.
However, buying undervalued shares today may lead to high returns in the long run. Previous bear markets have proved to be excellent buying opportunities for a wide range of investors. Adopting the same strategy in today’s situation could lead to similar results in the coming years that help to boost the performance of your Stocks and Shares 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.