Having £10k available to invest today could put you in a strong position to generate high returns from the FTSE 100. Admittedly, other assets such as cash and bonds may be less risky in the short run. But they may also fail to produce the high returns that are likely over the long run through buying FTSE 100 shares.
As such, now could be the right time to buy cheap FTSE 100 stocks. Yes, they may yet fall further in the short run. But their long-term prospects appear bright compared to other popular assets.
Investing £10k today
The FTSE 100 is a far riskier investment than other mainstream assets such as cash and bonds in ‘normal’ economic times. However, at the present time, the difference between stocks and other assets when it comes to the risk of loss is likely to be far greater than usual. Some FTSE 100 companies are seeing their worst operating outlook for many years. This could lead to lower sales, a slump in profits and falling stock prices.
As such, there is a risk that buying shares today leads to losses for investors. The situation regarding coronavirus may worsen over the coming weeks. And this could cause investor sentiment to deteriorate and share prices to decline. It may mean the returns on cash and bonds are superior to equities over the near term.
FTSE 100 reward prospects
However, investors who can take a long-term view of their portfolio may be far better off buying shares with £10k (or any other amount) today. The track record of the FTSE 100 highlights that it has delivered annualised total returns of around 8%. And that is even taking into account its recent decline. This is significantly higher than the returns of less risky assets such as cash and bonds over the same time period – especially since low interest rates could limit their prospects.
Furthermore, the FTSE 100 could produce even higher returns for investors from its current level. Many of its members’ share prices have fallen sharply and so appear to offer wide margins of safety. In some cases, those falls may have been overdone when you consider firms’ financial strength and strong competitive positions. As such, investors buying shares today could fulfil the popular strategy of buying low and selling high in the long run.
But how to buy FTSE 100 shares? Well, Stocks and Shares ISAs offer a low-cost means of accessing a tax-efficient product. And the returns available to long-term investors could be significant.
Certainly, buying FTSE 100 when there is a very real risk of paper losses being incurred in the short run may dissuade some investors from focusing their capital on equities at the present time. But on a long-term basis, cheap FTSE 100 shares that form part of a diverse portfolio could deliver significantly greater returns than other assets.
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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.