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Forget buy-to-let. I’d buy cheap FTSE 100 shares in this market crash to retire early

The FTSE 100’s recent market crash has left many investors with significant losses on their existing holdings. This may naturally dissuade them from buying further stocks, since they may wish to recover their losses before investing further in large-cap shares. They may even decide that less volatile assets, such as buy-to-let property, are more attractive.

However, the FTSE 100’s low valuations, its recovery potential and the chance to diversify across the world’s fastest-growing economies mean that it may offer a superior risk/reward opportunity than buy-to-let. As such, buying shares in this market crash could help you to retire early.

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Diversification

One of the challenges facing buy-to-let investors is that diversification requires an exceptionally large amount of capital. Buying a handful of properties to reduce risks (such as rent not being paid, void periods and repairs being required) is likely to cost a significant amount of money – even if you borrow a large proportion of the purchase price.

By contrast, diversifying among FTSE 100 shares is a relatively low-cost and simple exercise. The index generates around two-thirds of its revenue from economies outside of the UK. It also contains a wide range of companies that operate in varied sectors. Therefore, investors can build a portfolio of businesses that, together, offer a high degree of diversity. This reduces overall risk, and may improve your long-term returns.

Valuations

As well as offering a greater amount of diversification, the FTSE 100 appears to be more attractively priced than buy-to-let property after the market crash. Many FTSE 100 companies are now trading on valuations that are well below their historic averages. In some cases they face very challenging futures. But many large-cap shares have the financial strength to overcome their short-term risks and produce improving profitability in the coming years.

Buy-to-let property may not have experienced a visible decline in its value in recent weeks, as per the FTSE 100. But it seems unlikely that the coronavirus lockdown will have left prices at a similar level to where they were a few months ago. Fears surrounding job security and an uncertain economic outlook may mean that, as well as being relatively unaffordable, property prices experience limited growth in the coming years.

FTSE 100 recovery prospects

Both buy-to-let property and FTSE 100 shares have solid track records of recovering from their past downturns. Therefore, they are likely to deliver high returns in the long run that could produce strong capital growth for investors.

However, low valuations across the FTSE 100 mean that it could produce higher returns than buy-to-let property. It also appears to offer less risk due to its diversification prospects. Therefore, buying FTSE 100 shares today could be a sound means of boosting your financial outlook. It could even help you to retire earlier than you had previously expected.

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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.