The recent FTSE 100 crash could allow many long-term investors to benefit from cheap shares and a market recovery over the coming years. This prospect may seem unlikely at present. But the track record of the index suggests investor confidence is very likely to return as global economic growth resumes.
Therefore, now could be the right time to purchase high-quality businesses while they offer wide margins of safety. Doing so through a tax-efficient account, such as an ISA, may improve your total returns in the long run.
FTSE 100 market crash
The recent FTSE 100 market crash may have caused many investors to become concerned about their portfolio’s prospects. In the near term, the index may experience further instability. They could even return to a decline should the outlook for the economy fail to improve as lockdown measures are eased.
However, the past performance of the stock market shows such a situation is unlikely to last over the long run. In fact, the FTSE 100 has experienced numerous downturns and bear markets since its inception in 1984. It’s been able to not only recover from them, but produce new record highs.
As such, buying cheap shares while there’s a real risk of a decline in the short run could be a means of adding high-quality businesses to your portfolio when they offer wide margins of safety.
Of course, buying the cheapest FTSE 100 shares you can find may not be a prudent strategy. Some businesses may emerge from the current crisis in a much weaker position relative to their peers. Some companies may even fail to survive an unprecedented period for the economy.
Therefore, it’s crucial to understand the strengths and weaknesses of a business before buying it. Understanding its balance sheet strength, assessing its economic moat, and determining its chances of maintaining its market position. All these can provide guidance on whether a stock can benefit from the FTSE 100’s long-term recovery prospects.
This may mean you pay a little more for high-quality businesses. But, with the index currently trading at what seems to be an attractive price level following its market crash, there seems to be a significant amount of recovery potential on offer.
Stocks and Shares ISA
Buying cheap FTSE 100 shares through a Stocks and Shares ISA could be a sound means of improving your total returns in the long run. The cost of coronavirus may lead to higher tax rates in the long run, which could make investments in ISAs even more valuable.
With it being simple and straightforward to open an ISA online, as well as relatively cheap, now could be the right time start buying FTSE 100 shares. A recovery may not be guaranteed following the market crash, but history suggests that long-term investors are likely to benefit from low prices across the index over the coming years.
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.