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£5k to invest today? I’d buy cheap FTSE 100 stocks in an ISA to get rich and retire early

Investing £5k, or any other amount, in FTSE 100 shares after the recent market crash may not seem like an attractive proposition to many investors. Even though the stock market has rebounded from its March lows, an uncertain economic outlook could halt the FTSE 100’s progress over the near term.

However, low valuations on offer across the index could make now a worthwhile buying opportunity. With it being cheaper and simpler than ever to invest in a tax-efficient manner through a Stocks and Shares ISA, buying FTSE 100 shares today could improve your chances of retiring early.

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FTSE 100 uncertainty

Due to the world economy facing an unprecedented crisis from coronavirus, the future performance of FTSE 100 stocks is highly uncertain at the present time. They could continue their recent rebound to produce a strong market rally, or further cases of coronavirus may push the index back into a decline.

That risk, however, could mean that there are attractive buying opportunities available for long-term investors. Indeed, in the past the FTSE 100’s best buying opportunities have often coincided with its periods of greatest uncertainty. Risks cause investors to price-in wider margins of safety. This can lead to higher returns as the stock market recovers.

Therefore, although buying shares today may produce paper losses over the short run, in the long run the strategy may lead to a strong performance that improves your retirement outlook.

Stock valuations

Clearly, some companies merit low valuations at the present time. Some industries, for example, are partially or even fully closed. Therefore, some stocks in the FTSE 100 may experience a period with zero sales that cause significant losses.

However, other FTSE 100 companies may be substantially undervalued. Although their financial performance may suffer to some extent in the near term, their dominant market positions and capacity to return to growth in the coming years may mean that they are highly attractive following their recent share price falls.

They may be suffering from a desire among some investors for less risky assets, which has reduced demand for equities. Investors who are able to take a long-term view of their portfolios may, therefore, be in a strong position to pick and choose the most attractive businesses in the index.

Stocks and Shares ISA

The simplest way to invest in FTSE 100 shares at the present time may be through a Stocks and Shares ISA. It is cheap to set up, simple to manage and offers a great amount of tax efficiency. It also provides unlimited withdrawals without penalty, so could provide flexibility for a wide range of investors who are at different stages of their lives.

Although there is no guarantee that the FTSE 100 will recover from its recent market crash, its track record suggests that such an outcome is likely. Capitalising on low valuations has been a successful strategy to generate high returns in the past, and could offer similar performance in the coming years that allows you to retire early.

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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.