If you are tempted to park your investible funds in a Cash ISA right now, I can see why. In uncertain times like these, when you just don’t know what comes next, it’s difficult to take an investing decision. Even if there are cheap FTSE 100 shares around, we don’t want to get our fingers burnt. Returns on a Cash ISA may be small, but at least they’re predictable.
That’s far more than can be said for many stocks right now. That’s especially true for income investors. A slew of FTSE 100 companies have suspended dividends in recent weeks. And there’s no way of knowing how long the companies that are still paying dividends will continue to do so. But if hunting for dividend-paying stocks isn’t a good investing strategy these days, neither is a Cash ISA.
Cash might be dependable as an investment, but avenues for much higher returns have opened up. I’m talking about high-quality growth stocks. Stock market crashes aren’t discriminating. When the market goes down, even great stocks go down with it. This gives investors a good opportunity to buy these cheap FTSE 100 shares. Like right now.
How to buy cheap FTSE 100 shares
But figuring out how cheap a stock really is may not be as straightforward as it appears. Looking only at the actual price of the stock can be misleading. A lower price allows me as an investor to buy a larger number of shares with my £1,000 investable capital. But, holding a larger volume of shares is desirable only if the stock’s expected price will grow faster than other shares. If a pricier stock shows much higher growth potential, I would suggest considering that one instead.
Further, instead of going by the absolute prices levels, I’d use the price-to-earning ratio (P/E) to figure out how a share’s price compares to others. If a stock’s P/E is low compared to FTSE 100 peers with similar prospects, then it’s likely a good opportunity. Another way to use P/E is to examine a stock’s history. If the P/E is now lower than in the past, everything else remaining the same, that also indicates an opportunity to buy. Whichever way I look at it, a FTSE 100 share like this would be a buy for me.
Going by this, there are plenty of cheap FTSE 100 shares to buy right now. While the FTSE 100 has recovered quite a bit, it can go higher still. There’s no way of knowing how long it will take to go back to its earlier highs. Incoming economic data and forecasts suggest that it could be a while. But that needn’t be bad news for the long-term investor. In fact, it’s an opportunity to take some time to pick the right stocks and then hold them for years. Hopefully, by then we will have put the negative events of 2020 behind us.
Views expressed 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.