Investing £1k, or any other amount, after the FTSE 100’s recent stock market crash may not sound like a great idea to some investors. There’s a realistic chance the index’s price level will move lower in the short run. That depends on economic data and for how long the current lockdown continues.
However, now could be an opportune moment to buy a range of FTSE 100 shares for the long run. Many of the risks facing the economy seem to be priced into valuations. Meanwhile, the long-term recovery potential for the economy could lift share prices across the index.
Margin of safety
The valuations currently present across the FTSE 100 suggest investors are expecting a period of intense economic difficulties. Many FTSE 100 companies currently have valuations significantly below their historic averages. In some cases they may be deserved, since a number of sectors could endure a prolonged lockdown, causing a substantial loss of earnings.
However, other sectors may be significantly undervalued at the present time. Their members may not necessarily experience a prolonged and significant decline in financial performance. Yet weak investor sentiment towards the stock market may be weighing down their valuations. Therefore, they could offer wide margins of safety that lead to high returns for investors over the long term.
At present, the outlook for the economy is exceptionally tough. In fact, it’s difficult to recall the prospects for the economy being so downbeat. That’s because previous recessions didn’t entail a complete shutdown of vast swathes of the economy.
However, the track record of the economy shows it has always experienced booms and busts. Neither has lasted indefinitely, and they’ve eventually been superseded by growth or decline. The economic recovery from the impact of coronavirus could prove to be fast or slow. But over the long term, operating conditions for FTSE 100 companies are very likely to improve.
As such, buying stocks that aren’t only cheap, but can survive the present difficulties facing the economy, could lead to high returns in the long run. They may experience a strong recovery over the coming years that’s currently not being factored into their valuations.
Investing £1k in the stock market may make it difficult to achieve a worthwhile level of diversification. As such, investing in a FTSE 100 index tracker fund could be a sound move. It provides access to all of the stocks in the index for minimal annual fees.
Of course, investors who are able to purchase individual shares may be able to generate market-beating returns. As mentioned, some sectors and companies appear to be undervalued due to the wider market’s unpopularity among investors. This could present a buying opportunity that may make now the right time to buy undervalued FTSE 100 stocks 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.