The FTSE 100’s crash in recent weeks means now could be the right time to buy high-quality stocks for the long run. In many cases, they’re likely to survive the prospective global recession caused by coronavirus. In the coming years, they look set to deliver share price recoveries. That’s because the index has a solid track record of recording successful comebacks from its very worst bear markets.
By contrast, investing in Bitcoin continues to be a very risky strategy. There’s a lack of data available to investors to determine its price level. There’s also regulatory threats to its prospects. This means its risk/reward ratio could be less attractive than bargain FTSE 100 shares.
A cyclical market
The FTSE 100’s recent crash has caught most investors by surprise. The index was performing relatively well, and had overcome a variety of threats to post a rising price level. Now, though, its near-term prospects are highly uncertain. It could realistically move lower in the short run, since the progress being made on defeating coronavirus is difficult to accurately predict.
However, the FTSE 100 has experienced bear markets many times before. Sometimes they’ve been short and sharp. But, in other cases, it’s taken a number of years for the index to make a full recovery. The common theme among the FTSE 100’s bear markets is that the index has always recovered to post new record highs. As such, investors who buy large-cap shares while they offer wide margins of safety could generate high returns in the coming years.
As mentioned, the world economy faces a difficult outlook. Therefore, some companies and industries are likely to come under severe financial pressure. It makes sense for investors to focus on the financial strength of a business. This will gauge its chances of surviving what could yet be a prolonged economic downturn. Companies with net cash positions and a high degree of variable, rather than fixed, costs may be better equipped to survive a potential recession.
Likewise, buying a range of shares within your portfolio could be a sound move. This strategy reduces your reliance on a small number of stocks. It also means your overall returns are less impacted by difficulties experienced by one or more businesses. Since diversifying is relatively inexpensive due to online sharedealing opportunities, it’s an accessible strategy for most investors.
While the FTSE 100 may offer investment appeal, Bitcoin’s risk/reward ratio appears to be relatively unfavourable. Its lack of data and reliance on investor sentiment means investors cannot determine its intrinsic value. This could lead to it being overvalued without investors being aware of it.
Furthermore, Bitcoin faces regulatory risks from policymakers that could derail its progress. This could lead to it delivering disappointing returns while the FTSE 100 makes a likely recovery over the long term.
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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.