Opening a Stocks and Shares ISA to buy FTSE 100 companies right now may seem to be a risky move. After all, the FTSE 100 is displaying high levels of volatility. It could easily fall further in the short run if news flow surrounding coronavirus is negative.
However, now could be the right time to buy a range of shares. The FTSE 100 offers a wide margin of safety, high yields, recovery potential and superior return prospects compared to other assets. Coupled with the tax-efficiency of a Stocks and Shares ISA, this could improve your long-term financial future.
Buy low, sell high
A key reason why buying FTSE 100 shares through an ISA today could be a good idea is that valuations across the index are relatively low. Most companies operating across a variety of sectors appear to have valuations that are substantially lower than their historic averages. Yes, their valuations could decline yet further in the near term. But the track record of the stock market shows that there has been a reversion to average valuations over the long run.
Therefore, buying stocks while they trade at wide discounts to their intrinsic values may enable investors to generate high returns as the FTSE 100 recovers. This process may take time. It could even last for a number of years depending on the severity of the economic impact from coronavirus. But, encouragingly, the FTSE 100 has a strong track record of recovery from even its very worst bear markets.
Of course, buying FTSE 100 stocks today could lead to paper losses in the short run. It is impossible to know the severity of the spread of coronavirus, and to what extent it will disrupt the wider economy.
However, such risks can produce even more attractive buying opportunities for investors. In fact, for share prices to move lower and become more attractive, there usually must be some kind of economic uncertainty on the near-term horizon. Otherwise, investor sentiment would be much more optimistic, and this would cause share prices to be higher.
Encouragingly, periods of weak investor sentiment and challenging economic prospects have never lasted indefinitely. They have always given way to economic booms and bull markets. At the present time both of these events may seem to be a long way off. But the track record of the stock market suggests they have a high chance of occurring over the coming years.
Stocks and Shares ISA
With a Stocks and Shares ISA offering tax efficiency and simplicity, as well as low charges, it could be the ideal vehicle through which you can capitalise on the FTSE 100’s low price level. There may be further ups and downs ahead, but for long-term FTSE 100 investors now could prove to be a worthwhile buying opportunity.
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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.