The FTSE 100’s recent market crash may have caused some investors to determine that shares are too risky to buy at the present time. After all, the index has fallen by as much as 35% since the start of the year. And further declines could be possible, depending on how the news flow on coronavirus changes in the coming months.
However, buying shares today could prove to be a sound move. The FTSE 100 appears to offer better value for money than buy-to-let properties, for example. Large-cap shares also offer greater tax-efficiency, as well as a higher income return. Therefore, now could be a good time to buy them, rather than invest in a buy-to-let property.
Value for money
The FTSE 100’s recent decline means that the index now appears to offer excellent value for money. For example, it trades at a lower level than it did around 23 years ago. And its dividend yield of around 6% suggests that it offers a wide margin of safety alongside its income appeal.
Furthermore, a wide range of high-quality stocks currently have ratings that are substantially below their long-term averages. Valuations tend to revert to their long-term historic mean over time. So their prices are unlikely to remain at their current low ebb over a period of years. Investors who can buy now and hold for the long run could find bargain shares are available across the FTSE 100’s various sectors.
By contrast, house prices continue to be relatively high compared to average incomes. Moreover, the housing market moves at a much slower pace than the stock market. It could, therefore, experience a period of decline as the economic impact of coronavirus becomes clear. As such, buying property once restrictions regarding viewings are over may not lead to the same level of returns as has been the case over the past few decades.
The government’s response to coronavirus has included increased spending. This could mean that higher taxes are ahead over the long run. Buy-to-let investing has already experienced major tax changes over recent years. Think mortgage interest payments no longer allowed to be offset against rental income for many landlords. With buy-to-let investing potentially being an easy ‘tax grab’ for the government, it would be unsurprising for further tax changes in this area.
By contrast, investing in the FTSE 100 through a Stocks and Shares ISA or a SIPP provides tax efficiency. There is no tax levied on amounts invested within those products. And this could help to further enhance your returns compared to buy-to-let properties. With it being relatively simple and affordable to open such products, they are available to all investors.
Market crashes such as that seen recently in the FTSE 100 do not come along very often. While it may not yet be over, history suggests that the index has strong recovery potential. It also suggests it may deliver high returns in the coming years. As such, now could be the right time to buy a range of FTSE 100 shares and hold them for the long run.
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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.