Buying FTSE 100 stocks following the recent market crash could improve your ISA returns over the long run. Certainly, there are significant risks present due to vast swathes of the economy being shut down. But over the long run, the FTSE 100 could experience a strong recovery that lifts the prices of your holdings.
As such, now could be the right time to adopt a long-term focus and buy high-quality FTSE 100 shares. Doing so could increase your chances of becoming an ISA millionaire.
Margin of safety
Buying shares while they offer a wide margin of safety could enhance your long-term returns. A margin of safety is present where a company’s shares trade for less than they are worth. And investors are likely to benefit from a more favourable risk/reward opportunity as a result.
At the present time, the FTSE 100 is trading significantly below its record high. Many of its members have valuations that are unusually low. Such valuations are often only available during bear markets. Of course, they may experience further share price declines that make them even more attractive over the near term. But over the long term, it seems likely that many of the FTSE 100’s incumbents have the capacity to deliver strong capital growth as the economy recovers.
Of course, it is near-impossible to predict the prospects for the FTSE 100 over a matter of months. But its long-term performance may mirror its track record to some extent. In other words, the index has a history of cyclicality, with investors having overreacted to bull markets and to bear markets on a number of occasions. This has caused share prices to be mispriced at times. But this provides opportunities for long-term investors to buy at a low price and sell at a high price.
At the present time, investor sentiment is weak. Although the FTSE 100 has shown signs of a rebound in recent weeks, investors are pricing in a challenging period for the global economy. This could provide an opportunity for long-term ISA investors to buy companies that are likely to survive the short-term difficulties facing the world economy. They may be in a strong position to benefit from a global economic recovery over the coming years, which could boost your portfolio’s returns.
Clearly, there are risks attached to buying shares following a market crash. The FTSE 100 could experience further falls in the near term. And the prospects regarding coronavirus and its impact on the economy are impossible to accurately predict.
However, investors who are seeking to build a seven-figure ISA over the long run could benefit from buying undervalued shares today. The past performance of the FTSE 100 suggests just that. Buying while investor sentiment is weak can lead to impressive returns in the long term as the market moves into a more bullish phase following its 2020 bear market.
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.