The FTSE 100’s recent market crash is likely to have caused many investors to adopt a more cautious attitude when investing through their Stocks and Shares ISA. This is understandable, since the prospects for the world economy are highly uncertain.
However, lower valuations are now present across the index following its market crash. This could provide an opportunity for long-term investors to buy high-quality businesses trading at attractive prices. This could increase your chances of building a £1m+ ISA over the coming years.
Buying opportunities in a market crash
The FTSE 100’s past performance shows it has experienced numerous market declines since its inception. Certainly, the recent market crash was sharper and faster than many of its previous bear markets. But it’s by no means the first time the index has traded at a significantly lower price level compared to its recent highs.
The common theme among its previous downturns is that the index has always recovered from them. Therefore, investors who’ve purchased a diverse selection of FTSE 100 companies priced at low levels have generally benefitted from the index’s subsequent recovery. Although a recovery may not seem especially likely at present, in the coming years the index’s history suggests it will take place.
Buying shares when they’re at low prices is a better means of making a large profit in the long run than purchasing them at higher prices. So now could be an excellent opportunity to enhance your ISA’s prospects.
Of course, the timescale over which the FTSE 100 delivers a recovery is a known unknown. Past bear markets have varied in terms of their length. That’s because the index sometimes experiencing brief rallies followed by a further market crash.
As such, it’s imperative investors adopt a long-term time horizon. This will allow your holdings to overcome the challenges they face in the short run, and deliver on their growth potential. It’ll also provide other investors with the time they need to become increasingly bullish about equities. That could further catalyse the share prices of your holdings.
The prospect of short-term economic challenges means buying financially-sound businesses is arguably more important than ever. Checking whether a FTSE 100 company has a solid balance sheet, in terms of modest debt levels and sufficient cash to withstand a period of lower sales, could reduce your risks. It may also lead to higher returns. That’s because you’re likely to limit your overall losses through buying strong businesses that can survive difficult trading conditions.
Making a million
Clearly, it’s likely to take many years for any investor to generate a £1m ISA. However, the chances of you achieving this goal could be increased through buying cheap FTSE 100 shares in a market crash. Through managing short-term risks, you could experience high returns in the long run that improve your financial prospects.
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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.