Investing for the first time during a FTSE 100 market crash may be a risky move in the short run. After all, your holdings could decline in value over the near term. That’s because the economic impact of coronavirus could prove to be greater than investors are currently anticipating.
However, over the long run, a strategy that focuses your capital on FTSE 100 shares could significantly outperform savings held in a Cash ISA. As such, now could be the right time to start buying undervalued stocks. They could improve your retirement prospects.
Cash ISAs have become relatively unattractive over recent years. A period of low interest rates has meant income returns, in many cases, are lower than inflation. Over the next few years it wouldn’t be a surprise if interest rates fail to rise at a rapid rate.
That’s because the Bank of England is likely to a support monetary policy. In other words, it could keep interest rates low to help the economy in the aftermath of the coronavirus pandemic.
As such, long-term returns on Cash ISAs could lead to a loss in your spending power compared to FTSE 100 shares. This could make the prospect of retiring early less likely. It may also mean you require a significantly larger sum of capital to enjoy financial freedom in older age than you’d previously expected.
Of course, the main benefit of having a Cash ISA is that it won’t lose money in the short run. The FTSE 100 has experienced a rebound over recent weeks following its market crash, but this may prove to be short-lived depending on news regarding coronavirus.
While this may be the case, over the long run the index looks set to produce strong returns from its current price level. Many of its members currently have valuations that are significantly lower than their historic averages. Meanwhile, their long-term growth potential seems to be high as a result of them having competitive advantages over their peers.
Furthermore, the FTSE 100 has a successful track record of delivering growth even after its past downturns. As such, if you are aged 40 (or have a long time horizon) you’re likely to have sufficient time for the index to recover significantly from its current woes prior to your retirement.
Investing in FTSE 100 stocks is a relatively straightforward process. Online sharedealing accounts can be opened in a matter of minutes. And their costs are also low enough to make them accessible for a wide range of investors.
Therefore, with the FTSE 100 trading at a relatively low level, now could be the right time to focus your capital on stocks, rather than a Cash ISA. It could certainly improve your long-term financial prospects.
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.