The FTSE 100’s crash has caused most investors to experience significant declines in the value of their portfolios. In the near term, it would be unsurprising for the FTSE 100’s recent trend to continue. After all, the number of coronavirus cases looks set to rise even further over the coming weeks.
However, history suggests that buying while the prospects for the index and the wider economy are at their worst is a sound strategy for long-term investors. Just as there were buying opportunities following previous crises, there appear to be undervalued, high-quality businesses on offer within the FTSE 100. Investing £5k, or any other amount, in them could improve your financial prospects.
At the moment, it’s difficult to be optimistic about the FTSE 100’s outlook. Investor sentiment is weak, and could deteriorate over the coming weeks as coronavirus becomes more prevalent worldwide.
However, it was a similar story in previous economic crises. In 1987, for example, the daily declines in the FTSE 100 were even greater than they have been in 2020. And, the technology bubble bursting at the start of the century took place over a similar timeframe to the fear caused by 9/11. More recently, the global financial crisis induced panic among investors, businesses, and consumers that produced the worst recession since the Great Depression.
Despite this, the FTSE 100 recovered from each of those challenges to post new record highs in the following years. At the present, this seems like a highly unlikely situation. But, the past performance of the world economy shows that it is very likely to recover from its current difficulties. This could lead to high returns from FTSE 100 shares in the coming years.
Buying a diverse range of companies could be a sound means of reducing your portfolio’s risk. That’s especially the case at the present, since some industries could experience a severe decline in demand for their products or services.
Through purchasing companies that operate in different regions and across multiple industries, you can reduce your reliance on a specific stock. This may not only cut the risks in your portfolio, but also enable you to generate higher returns as a broader recovery takes hold.
Furthermore, assessing the financial strength of companies before buying them could be a sound idea. You may wish to buy stocks in companies with only modest debt levels, and that have ample headroom when paying interest on their debt. They may be less likely to suffer from the reduction in sales in the short run, and could deliver higher returns in the long run.
Although buying any stock today is a risky move in the short run, through purchasing high-quality stocks at discounted prices you could capitalise on the recovery potential of the FTSE 100. This could boost your financial prospects in the long run, and help you to outperform the wider index in the coming years.
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.