The FTSE 100 may have experienced one of its sharpest ever falls over recent weeks, but it looks set to deliver a successful rebound. In fact, it has always been able to produce new record highs after its previous downturns. And, while that outcome may seem unlikely at the present time, investors who prepare now for a recovery could generate high returns in the coming years.
In fact, through buying a diverse range of financially-sound businesses at low valuations today you could improve your financial prospects over the long run.
Before any company can benefit from the economic recovery that looks set to take place over the coming years, it must first survive the present challenges facing many sectors in the world economy.
Sales across a range of sectors are either substantially lower than normal, or at zero, as lockdowns have caused demand for a variety of products and services to decline. This situation could remain in place for many weeks, or even months. As such, buying stocks that have solid balance sheets could be a sound move. It could reduce your risks and increase your chances of taking part in a long-term recovery.
For example, companies that have large net cash, or modest net debt, positions could be relatively attractive. They may be able to survive difficult operating conditions for a longer period of time than their sector peers. And this may allow them to generate high returns in the long run.
Diversification is a simple, yet highly effective, means of reducing your risks. Put simply, owning a larger number of companies reduces your reliance on one or more businesses to contribute to your portfolio’s returns. Since many companies now face uncertain futures, diversification may be more important than ever.
Of course, some geographies may experience more challenging futures than others. Therefore, owning stocks that have exposure to different regions across the world could be a sound move. The FTSE 100 derives around two-thirds of its revenue from outside the UK. So investors can obtain a high degree of geographic diversification without buying companies outside of the FTSE 100.
FTSE 100 valuations
Many companies currently trade at low prices. In some cases, they may be merited. Companies that have no sales at the present time, and could fail to generate any revenue over the coming months, may be worthy of a very low price. In other cases, some companies have not experienced material financial challenges from coronavirus. They could be worthy of a higher price than their index peers.
As such, assessing the quality of your holdings, as well as their prices, could be a sound move. It may even be a good idea to hold more expensive stocks that have brighter futures in your portfolio. Owning a diverse range of such companies could improve your chances of capitalising on the likely rebound in the FTSE 100 over 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.