The FTSE 100’s recent market crash may cause some investors to consider selling their stocks. Certainly, there could be further declines ahead for the stock market. After all, the course the coronavirus pandemic takes is impossible to accurately predict at this stage.
However, the FTSE 100’s low valuations, its track record of recovery and the lack of investment appeal from other assets could mean that now is the right time to buy (rather than sell) shares.
The FTSE 100 has experienced an extremely fast pace of decline in recent weeks so that it is in the midst of a bear market. As such, many of its members now trade on exceptionally low valuations. In many cases, they are significantly below their historic averages. This could enable investors to purchase high-quality businesses while they offer wide margins of safety. Historically, this strategy has proved to be an effective means of capitalising on the FTSE 100’s cyclicality.
Of course, valuations across the stock market may not rebound quickly. Coronavirus may yet cause severe challenges for the global economy. But investors who have a long time horizon may wish to take advantage of low valuations today to position their portfolio for growth in the coming years.
In terms of a recovery, the FTSE 100’s track record suggests that it is very likely to happen. Previous bear markets have taken a matter of months in some cases, and years in others, to record a recovery. At the present time, it is not possible to say how long it will take for a bull market to re-emerge. However, the FTSE 100 has always recovered from its various bear markets to post new record highs.
Clearly, a recovery currently seems to be unlikely. The number of reported coronavirus cases is, sadly, continuing to rise and may follow this trend for many weeks. But if news flow does improve, investors may quickly become increasingly optimistic. This could lead to a recovery in the FTSE 100’s price level over the coming years.
Investors with a long time horizon may struggle to obtain impressive returns from mainstream assets, other than equities, at the present time. Cash savings accounts, for example, may lag inflation when it comes to their returns. Likewise, bond yields are relatively disappointing due to interest rates currently being at their lowest ever level. And with tax changes affecting the returns on buy-to-let properties, the stock market could offer the highest potential rewards for investors.
Therefore, now could be the right time to buy a wide range of undervalued FTSE 100 shares for the long run. They could outperform other mainstream assets in the coming years and boost your financial prospects as the likely stock market recovery takes hold.
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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.