The FTSE 100 has fallen by roughly 23% in the year-to-date as share prices slumped due to the coronavirus outbreak. The damage that the crisis will cause the global economy is still unknown, which is understandably making investors feel uneasy. It is certainly a risky time to be investing in shares for the short term.
However, the FTSE 100 has crashed multiple times since its inception in 1984. After each fall, the market has climbed higher and regained its previous losses.
Of course, the past might not repeat itself. However, there are already signs that the market might be rebounding, with the FTSE 100 climbing by 17% since March 23. I think now could a great time for long-term buyers of FTSE 100 shares.
Buying FTSE 100 shares
In this stock market crash, some investors might feel that buying FTSE 100 shares carries too much risk. Consequently, consideration might be given to other investments like cryptocurrencies.
But cryptocurrencies, such as Bitcoin, have no underlying value. This is one of the reasons why its price can fluctuate wildly. When you purchase shares, you are buying part of a real business.
And the recent drop in share prices means that some quality UK companies could be trading at a level below intrinsic value.
For example, Unilever’s share price has fallen by almost 7% in the year-to-date. It is currently trading with a price-to-earnings ratio of just 18. I believe that many of its low-cost products — like Marmite and Domestos — will still be in demand through the crisis and when things start turning back to normal.
Time in the market
Investing in stocks and shares successfully usually requires a long-term outlook. Even Warren Buffett admits that he is unable to predict what the market will do in the next year or two.
Although FTSE 100 shares have been rocked by the coronavirus outbreak, by looking back, we can see that long-term investing is usually a good strategy. For example, the FTSE 100 has returned 66% since March 2009 without even including dividend payments. Fellow Fool Rupert Hargreaves notes that over the past three-and-a-half decades, the FTSE 100 has returned an average of 7%.
There is another benefit to buying stocks for the long-term. This is known as compound interest and its benefits become more fruitful the longer the investment remains in the market.
With an investment of £1,000 and a 7% average return over two years, your initial sum will return you almost £140. If we increase the period to 10 years, the same return of 7% will almost double your initial investment.
Amazingly, using this example, if you left £1,000 to compound with a 7% return for 20 years, you would end up with £3,869. By buying shares at regular intervals and reinvesting dividends to purchase more shares, investors can super-charge their returns even further.
With some FTSE 100 shares trading at recent lows, I will be looking for bargain buys that will benefit from the market’s likely long-term recovery and will leave the returns to compound.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.