The FTSE 100’s 33% decline since the start of the year may not be the end of its current downturn. Government restrictions in many parts of the world may lead to a severe drop in economic activity that causes investors to retain a negative stance on the prospects for shares.
However, in the long run, the FTSE 100 appears to offer recovery potential. Many of its members have high yields, stable balance sheets and track records of overcoming short-term challenges. As such, now could be the right time to buy a diverse range of income stocks with £10k, or any other amount, and hold them in the coming years.
The spread of coronavirus is showing little sign of slowing in the UK, Europe and many parts of the world. This may mean that restrictions on travel and freedoms become even more stringent. The end result could be severe declines for a number of sectors across the world economy, as well as disrupted trading for the majority of the FTSE 100’s constituents.
This may cause investor sentiment to weaken even further. Investors may consider that the situation for the world economy will deteriorate in the short run, and they may demand even wider margins of safety for large-cap stocks. This could mean that the index’s recent crash continues in the coming weeks.
Although the prospect of a falling stock market is unappealing to any investor, the FTSE 100’s current price level suggests that there are opportunities for long-term investors to capitalise on the index’s high yield. For example, the FTSE 100 has a dividend yield of around 6.5% at the present time. That’s significantly higher than it has ever been in the index’s history, and suggests that there are a large number of undervalued companies in the index.
Certainly, dividend cuts could be ahead. But investors seem to be anticipating such a scenario through the index’s low valuation. Many FTSE 100 companies have a large amount of headroom when making their dividend payments. They also have strong balance sheets and may be able to withstand challenging trading conditions over a short time period. The end result could be a strong buying opportunity for investors seeking to generate a passive income from their capital.
Clearly, diversifying across a range of sectors and geographies is more important than ever. This reduces the risk within your portfolio. It also enables you to benefit from the long-term growth opportunities that exist within the FTSE 100.
It may seem as though the current market crash is never-ending. Yes, it may continue over the short run. But buying a range of income stocks today and holding them over the long run could enable you to generate high returns in the coming years.
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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.