The FTSE 100’s recent market crash is likely to make some investors more risk-averse over the near term. As such, they may try to avoid losses on stocks by focusing their capital on other assets such as gold, Cash ISAs and buy-to-let property.
However, those assets may fail to produce returns that can match those of the FTSE 100 over the long run. The index’s recovery prospects and its low valuations could lead to high total returns for investors.
The FTSE 100 has a long history of experiencing bear markets, and recovering from them. Perhaps the first major decline in its price level occurred in the 1987 market crash. That was when the index declined by over 10% in one day as part of a wider slump in stock prices.
However, within two years it was trading at a higher level than before the 1987 crash. It has gone on to overcome several other bear markets, such as those of the early 2000s and the global financial crisis.
As such, a recovery from the index’s present challenges seems likely over the long run. Yes, the risks facing the world economy are unprecedented and there is currently no clear end in sight. But investors who buy high-quality stocks when they trade on low valuations have historically been rewarded.
Many companies will emerge from the current crisis in a stronger position relative to their peers. This could lead to impressive returns for long-term investors.
Of course, not every cheap stock is worth buying. Some companies, for example, may have weak balance sheets. Or they could experience a prolonged decline in their sales and profitability.
Therefore, it is crucial for investors to assess the quality of a business before buying it. That way, they can determine whether a company offers good value for money based on its price and the quality of its business model.
Through purchasing a diverse range of FTSE 100 stocks now and holding them for the long run, you can generate high returns while limiting your overall risks.
Low interest rates are likely to mean that Cash ISAs offer below-inflation returns. So holding equities could be a better idea than relying on savings accounts to fund your financial future.
Likewise, tax changes to buy-to-let investments may mean that the net returns available to landlords are relatively unattractive – especially since rental growth could be limited.
While the gold price could move higher in the short run if investor sentiment remains weak, the precious metal is trading close to an all-time high. Therefore, as investor sentiment towards risky assets improves, its scope to deliver capital gains may be limited.
As such, buying FTSE 100 shares while they are cheap could be a better means to generate impressive total returns in the long run.
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.