The FTSE 100 index has dropped by a significant amount recently, as investors look at alternative investments or just hang on to their cash. Since the start of the year, its value has slumped by 26%.
As people move away from FTSE 100 shares, now might seem like a strange time to be buying into the index. No one knows how much damage the coronavirus outbreak will cause to the global economy. The IMF is predicting that if the virus peaks in Q2, this could cause a $9trn loss to the global economy, which is more than the economies of Germany and Japan combined.
However, despite this bleak outlook, with FTSE 100 share prices trading at recent lows, now could be a great time to start investing £250 a month towards early retirement.
FTSE 100 index
The FTSE 100 index contains the UK’s top 100 listed companies. As you would expect, these businesses are involved in a variety of industries, ranging from oil, financials, consumables and technology.
Some of the companies in the index are trading at a share price below intrinsic value. This is something that investors such as Warren Buffett will evaluate, as it will determine whether or not there is an adequate margin of safety.
‘Pound cost averaging’ could be another way for personal investors to develop a further layer of safety. Investing a regular amount might help investors ride out some of the bumps of the index and will mean that more shares will be bought at low prices and fewer at higher prices. Therefore, if the FTSE 100 remains turbulent, pound cost averaging could be more beneficial than investing a lump sum.
Time to invest
Since its formation in 1984, the FTSE 100 index has dropped by a significant amount multiple times. But each time, the index has recovered these losses over the months or years that have followed.
Those saving for early retirement could have a long time frame to invest. As the market is turbulent, a longer horizon is for the best. Things could get worse for the FTSE 100 index before they get better. But with time on your side, purchasing high-quality stocks at low prices could improve your returns as you benefit from the likely recovery in the coming years.
Strategy
Investing in the FTSE 100 has never been easier. Personal investors can make their investments in a tax-efficient Stocks and Shares ISA wrapper. Various platforms also allow you to set up regular payment options for your investments.
It is also possible to invest in a FTSE 100 tracker, which aims to replicate the returns of the index. These often have low fees.
Although it is a contrarian view, now really could be a great time to purchase shares for retirement. Currently, we have the opportunity to purchase shares in quality companies for a much lower price than they were trading at last year — and lower than they will probably be trading at next year too.
Warren Buffett purchased his first shares in 1942. In recent years he has commented that “World War II didn’t look so good at that time.” However, he had faith that in the long term, the economy would prosper.
The rest is history.
