The stock market crash means the FTSE 100 is now trading almost 30% below the level at which it started 2020. In the short run, its performance is likely to be dependent on news flow and how investors react to it. As such, further declines in the index’s value cannot be ruled out.
However, in the long run, a recovery in the FTSE 100’s performance seems likely. Its track record suggests buying now could prove to be a profitable move for investors. That’s because the index has always successfully overcome its variety of bear markets to experience strong recoveries in the long run.
Short-term risks
News regarding the spread of coronavirus and its impact on the world economy is a known unknown. While it seems clear an economic slowdown will now take place this year, it’s currently impossible to know just how significant that will be. As such, the FTSE 100’s price level could continue to factor in a highly challenging period for the world economy and experience further declines in the short run.
Time horizon
Ultimately, this may mean buying stocks today leads to paper losses in the coming months. For investors with a long-term time horizon, this is unlikely to be a significant problem.
Certainly, paper losses are never something any investor wants to experience. But if you have a 10-year time horizon, for example, your portfolio’s performance in the next few months may not be your primary concern. As such, if you’re able to look beyond the FTSE 100’s near-term outlook, now could be a good time to buy a diverse range of stocks.
Valuations
The main reason for this is that the FTSE 100 appears to offer excellent value for money. It’s currently trading at the same level it did over two decades ago. Meanwhile, its 6%+ dividend yield suggests it also offers a wide margin of safety. Although dividend cuts are likely, they could rebound once the measures taken to contain the coronavirus are lifted.
Furthermore, the FTSE 100’s track record suggests buying now could be a sound move. It’s experienced bear markets fairly regularly. Crucially, it’s always recovered to post higher highs compared to previous price levels. And, since most investors aim to buy when stocks are cheap, now could be an opportune moment to implement that strategy.
Risk management
Managing current risks could be crucial to enjoying the likely recovery in the FTSE 100’s price level. As such, buying a range of high-quality businesses with solid balance sheets may increase your chances of taking part when the next bull market arrives.
It may be a distant prospect right now. But the FTSE 100’s historic performance indicates that long-term investors could enjoy a strong recovery in the coming years.
