Buying cheap FTSE 100 stocks may not seem to be a worthwhile means to make a million after the index’s recent decline. However, its track record suggests that buying when share prices are low can lead to higher returns over the long run.
As such, through buying a diverse range of businesses with strong balance sheets and wide economic moats, you could generate high returns that increase your chances of obtaining a seven-figure portfolio.
Diversification across the FTSE 100
It’s all too easy to overlook the risk of buying cheap FTSE 100 stocks and, instead, focus on their return prospects. However, the world economy faces an extremely uncertain future at the present time that could lead to many businesses experiencing challenging trading conditions.
As such, it’s imperative to consider the prospect for some of your holdings to deliver disappointing returns over the long run. In a diverse portfolio of FTSE 100 stocks, poor performance from a small number of them won’t impact on your overall returns to the same extent as it would in a concentrated portfolio.
Therefore, with it being relatively cheap to buy shares due to the prevalence of online share-dealing, purchasing a wide range of businesses that operate in a number of sectors could be a logical move. It may help to protect your portfolio from company-specific risk. It could also improve your return prospects.
Making a million from FTSE 100 shares is likely to take many years – even if you buy when stock prices are extremely cheap. However, to achieve that goal, your portfolio must first survive the difficult near-term prospects that exist as a result of an unprecedented lockdown.
Therefore, assessing companies based on their financial strength could be a means of increasing your portfolio’s survivability. For example, companies with modest debt levels, strong cash flow, and low fixed costs may fare better than their peers in the coming months. They may even be able to improve on their competitive position to increase their chances of generating high returns in the long run.
FTSE 100 companies with wide economic moats have often outperformed their peers. A competitive advantage may become even more attractive to investors over the coming years, since those businesses may be better placed to adapt to changing economic conditions.
As such, focusing your capital on FTSE 100 stocks with unique products, lower costs than their peers, or strong customer loyalty, may be a shrewd move. It may enable you to obtain a more attractive risk/reward ratio that protects your capital to a larger extent during an economic downturn and increases your chances of recovery.
This could improve your portfolio’s performance, and may increase your chances of making a million from investing in the stock market 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.