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Here’s why I’d invest £500 a month in cheap FTSE 100 stocks in an ISA starting today

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Investing £500, or any other amount, in FTSE 100 shares on a regular basis could prove to be a profitable move over the long run. The index currently contains many companies that appear to be trading at attractive prices. Over time, they could deliver strong recoveries from their current lows, which improves your financial outlook.

Of course, there are risks ahead in the short run. But, through persisting with a regular investing strategy, you could benefit from the FTSE 100’s likely outperformance of other assets. Especially when using a tax-efficient account such as an ISA.

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Long-term growth potential

Regularly investing in the FTSE 100 since its inception in 1984 would have been a highly profitable strategy. The index has risen from 1,000 points to around 6,000 points. It’s also produced strong dividend growth in that time.

As such, a monthly investment of £500 since the index’s inception would now be worth around £1.1m. During that time, of course, there have been many challenging periods for the FTSE 100. For example, it has experienced recessions, market crashes, and periods where other assets, such as buy-to-let properties, have appeared to be more attractive.

Despite its challenges, the FTSE 100 has made strong gains since its inception. Even though the current difficulties brought about by coronavirus may cause further declines in its price level in the short run, the index is very likely to produce impressive long-term growth. Therefore, buying large-cap shares regularly could allow you to take advantage of its recovery potential.

Relative appeal

Investing £500 per month in other assets is unlikely to deliver a return that’s as attractive as the FTSE 100. The key reason for this is that other mainstream assets, such as Cash ISAs and investment-grade bonds, currently offer exceptionally low returns. That’s due to interest rates being at historic lows.

For example, many Cash ISAs offer income returns that are 1.5%, or below. Assuming a 1.5% annual return on a £500 investment over the same 36 years of the FTSE 100’s existence would lead to a total valuation of £283,000. Although this is still a significant sum of money, it’s far lower than the gains delivered by the FTSE 100 over the same period.

FTSE 100 accessibility

Furthermore, the FTSE 100 is easy for many investors to access. Opening a tax-efficient Stocks and Shares ISA is cost-effective and can be completed in a matter of minutes online. This compares favourably to undertaking a buy-to-let property. This requires a large initial deposit, finance and legal costs. And, with the FTSE 100 offering a large amount of diversity, it may be a lower-risk opportunity than buying a small number of properties.

Therefore, while the FTSE 100’s future returns may, or may not, match those of its past, the index’s low price level suggests that it can produce impressive capital growth. As such, now could be the right time to start investing regularly in large-cap shares to boost your financial prospects.

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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.

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