Investing £20k, or any other amount, in a Stocks and Shares ISA today may not seem to be a sound move. After all, the FTSE 100 has experienced one of its fastest and most severe market crashes of all time.
In the short run, things could get worse before they improve. The spread of coronavirus may cause a prolonged recession. The prospect means investor sentiment is likely to remain weak over the medium term.
However, the valuations across the FTSE 100 and its track record of recovery suggest that now could be an opportune moment to buy high-quality stocks in an ISA.
Long-term growth
It can be difficult in situations such as these to put the recent market crash into perspective. Certainly, there has been a sharp and significant decline in valuations across the FTSE 100. However, the index has experienced similar, and even greater, falls in the past.
For example, less than four years after its inception, the FTSE 100 experienced the 1987 crash. This decimated the valuations of its members, but the index went on to recover. Similarly, its declines in the early 2000s and during the financial crisis were followed by recoveries which saw the index post new record highs.
Indeed, the FTSE 100 has risen around five-fold since its inception in 1984 – even after its recent crash. This equates to an annualised return of 4.6% plus dividends. Compared to other asset classes, the FTSE 100’s long-term performance has been exceptionally strong, despite the crises it has faced.
Therefore, while assets such as cash and bonds may seem appealing right now, buying FTSE 100 stocks could be a much better idea for long-term ISA investors.
Buying opportunities
Since the index’s fall has been widespread, affecting the vast majority of its sectors, it is fairly straightforward to find cheap stocks at present. More difficult is unearthing those companies that offer good value for money based on their financial standing and recovery potential.
It is unclear how long the lockdown will last, and how quickly the economy will recover. That being the case, investors may wish to purchase companies with strong balance sheets and solid cash flow. Such companies may be most likely to survive the current crisis, and to gain market share from weaker rivals. This could lead to them enjoying higher levels of profitability in the long run.
Furthermore, purchasing mature companies that operate in industries with defensive characteristics could be a sound move. They may be less risky compared to cyclical businesses that are more reliant on the performance of the economy in an uncertain period. And, by diversifying across a range of FTSE 100 stocks, you can reduce your overall risk and increase your chances of making a high return on your Stocks and Shares ISA in the long run.
