Investing £5,000 in cheap FTSE 100 shares today may not seem to be an appealing idea to many investors. They may understandably feel that the stock market could see further declines in the short run. That would mean it could be possible to buy the same stocks at lower prices in the coming weeks.
While that may prove to be correct, predicting the short-term movements of the stock market is notoriously difficult. As such, adopting a long-term view and buying undervalued stocks today could be a better idea.
The FTSE 100’s performance over recent months has caught almost every investor by surprise. Most investors were bullish prior to its market crash. Then many became extremely bearish about its prospects. However, the market rebounded and could now move sharply upwards or downwards in the near term.
Confused? It is almost impossible to predict the FTSE 100’s short-term price movements. There are a wide range of variables that could impact the index’s performance. This may mean that stock prices become more attractive, of course. But it could lead to investors who wait for lower prices missing out on bargain blue-chip stocks today.
Therefore, adopting a long-term view of your investments could be a good idea. Although the FTSE 100 could move in either direction in the short term, over the long run it is likely to produce strong gains. In fact, it has delivered an annualised total return of around 8% since its inception in 1984, despite experiencing a range of downturns and bear markets.
Investors who buy FTSE 100 shares while they are trading at their present low prices could generate even higher returns than 8% per annum over the long run. Although some large-cap stocks arguably deserve their low ratings at the present time as a result of their weak financial prospects, many blue-chip shares appear to be undervalued due to investors shifting their capital towards less risky assets. This may produce buying opportunities among high-quality businesses that go on to produce strong share price recoveries.
FTSE 100 diversification
Of course, we cannot deny that there are significant risks ahead for the FTSE 100. Therefore, investing across a range of businesses is a sound move. This means buying companies that operate in different geographies and in different sectors, as well as having a sufficient number of stocks in your portfolio to reduce your reliance on a small number of companies to produce your returns.
As ever, investing in FTSE 100 shares does not guarantee that you will earn a strong return in the long run. But through buying high-quality businesses now when they offer wide margins of safety and holding them for the long run, you can significantly increase your chances of making a fortune in the coming years.
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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.