The FTSE 100’s decline over the past month is showing little sign of turning into a sustained recovery at the present time. Investor sentiment is exceptionally weak, while the outlook for many industries is downbeat. As such, things could get worse for the FTSE 100 before they improve.
However, for investors with a long-term view, buying FTSE 100 stocks today could be a shrewd move. Their low valuations, recovery potential and income prospects may enable you to build a nest egg that allows you to retire early.
Many people who are seeking to build a nest egg for retirement will have plenty of time to do so. As such, the short-term movements of the FTSE 100 are unlikely to be a major concern for them. Clearly, paper losses are undesirable. But they are unlikely to have a direct impact on your retirement plans if you have time for your portfolio to recover from short-term challenges.
Therefore, the FTSE 100’s recent fall could be a buying opportunity for long-term investors. The valuations on offer across the index suggest that it offers high return potential in the coming years. For example, it currently has its highest-ever yield of around 6.5%. And, since many of its members trade on valuations which are substantially below their historic averages, there appear to be wide margins of safety on offer which could lead to high returns in the coming years.
Capitalising on the FTSE 100’s fall
Taking advantage of the FTSE 100’s recent crash could prove to be a simple process for investors. Opening a tax-efficient account such as a Stocks and Shares ISA is likely to be a sound first step. It can be opened online in a matter of minutes, while the annual charges are relatively low for some providers. This makes ISAs highly accessible to a wide range of investors.
Once opened, buying a diverse range of stocks is a sound strategy. Diversifying reduces the impact of a specific stock’s performance on your wider portfolio. This could help to protect your retirement plans from extreme weakness in one or more sectors caused by coronavirus. It may also enable you to take advantage of a wider range of growth opportunities that improves your retirement prospects.
Furthermore, buying high-quality stocks that have solid balance sheets, wide economic moats and strong cash flow could be a worthwhile move. They may be better able to not only cope with the disruption caused by coronavirus, but also to capitalise on weaker competitors to build their market share. Their returns may improve as a result, and this may be translated into a higher share price.
Buying shares today may not seem to be a sound move due to the prospect of paper losses in the short run. But, investors with a long time horizon are likely to have sufficient time for a recovery. Therefore, buying high-quality stocks now could help you to retire early.
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.