Buying cheap FTSE 100 stocks may not seem to be a good idea for anyone who’s seeking to retire in comfort. After all, the index has experienced extreme volatility in 2020 that’s included a bear market.
However, for long-term investors, the FTSE 100 could offer strong total return potential. It has a solid track record of recovery from its downturns. Meanwhile, many of its members appear to offer good value for money at the present time.
Therefore, if you’re aged 50, or have a long-term time horizon, now could be the right time to start building a retirement portfolio filled with large-cap shares.
Long-term recovery potential
The FTSE 100 may yet experience further difficulties in the coming months. The coronavirus pandemic is an unprecedented event, likely to cause a severe decline in GDP growth in the short run.
Knock-on effects could also include higher levels of unemployment and weaker consumer sentiment that creates more difficult trading conditions for many businesses. This may, in turn, cause a fall in their share prices.
But the index has experienced difficult periods previously. For example, the financial crisis in 2009, the tech bubble in 2003, and the 1987 crash all included extremely uncertain periods for those investing in the FTSE 100.
However, the index was able to fully recover from them, and was able to post new record highs in the years that followed those bear markets. Such an outcome isn’t guaranteed this time around. But history suggests that investors who’ve a long time horizon could benefit from buying undervalued stocks today.
FTSE 100 valuations
There are clearly major risks facing many FTSE 100 shares at the present time. However, in many cases, their prices reflect this. Many large-cap stocks currently offer margins of safety, where investors are demanding they trade at a discount to their real value.
This could present buying opportunities for investors. They may be able to purchase high-quality business while they trade significantly below their historic average valuations. In many cases, they’ve solid balance sheets and sound business models that will enable them to adapt to a changing global economic outlook. This could mean they maintain, or even improve, their competitive positions in the coming years.
One of the difficulties with investing is that the best times to buy FTSE 100 shares often coincide with the most precarious outlooks for the economy. However, through building a diverse portfolio of high-quality businesses and then holding them for the long term, you could improve your prospects of enjoying a growing passive income in retirement.
As such, now could be the right time to start buying stocks. If you’re aged 50, for example, you’re likely to have 15+ years until retirement. This is likely to be sufficient time for many FTSE 100 shares to deliver impressive total returns.
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.