The FTSE 100’s recent market crash isn’t the first time the index has experienced severe declines in its price level. Since its inception in 1984, the index has fallen heavily on a number of occasions. Following each of them, it has produced a successful recovery. Every time, share buyers have been handsomely rewarded.
As such, investors who’ve a long time horizon may benefit from buying FTSE 100 shares now while they’re trading on low valuations. Okay, this strategy could produce paper losses in the short run. But it may also improve your prospects of retiring early.
As mentioned, the FTSE 100’s past performance includes a number of bear markets. Notable downturns for the index occurred in 1987, the early 2000s, and the global financial crisis. During each of those periods, the index declined to exceptionally low levels. It felt at the time as through a recovery was very unlikely.
However, over time, the index did recover from its bear-market lows. On occasions, it experienced brief rallies during its downturns. But they proved to be false dawns for investors. However, over the long run, the index has generally recorded growth in its price level. And that’s very likely to be repeated in the coming years.
Long time horizon
Of course, investing during the FTSE 100’s downturns has been a risky short-term strategy. On a number of occasions during its previous downturns the index has experienced a large amount of volatility that has caused paper losses for investors.
At the present time, the index’s near-term prospects are highly linked to the re-opening of the global economy following the end of coronavirus. Since nobody knows when this will occur and, of course, whether there’ll be a second lockdown later this year due to a potential further outbreak, investors may experience disappointing returns in the short run.
However, if you’ve a long time horizon then the short-term performance of your portfolio is unlikely to be your primary concern. Investing in cheap stocks that have strong balance sheets may mean that the uncertain near-term outlook is a worthwhile risk in return for the long-term recovery prospects of the FTSE 100.
While the risks present across the economy may mean that now doesn’t seem to be the right time to start buying FTSE 100 shares, a recovery is only obvious after it has occurred. In other words, buying stocks after the index has exited its bear market may mean that you miss out on a sizeable proportion of their gains.
Therefore, adopting a long-term investment view and buying a selection of FTSE 100 shares now could be a sound move. It may improve your financial prospects and help to bring your retirement date a step or two closer.
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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.