Buying cheap FTSE 100 shares after the recent stock market crash may not seem like a sound way get rich and retire early.
However, the index has experienced similar declines in its price level in the past and has been able to fully recover from them. Therefore, investors aged 40, or who have a long time horizon, are likely to have sufficient time for their holdings to recover.
Furthermore, with the FTSE 100 currently offering low valuations across many of its sectors, now could be the right time to start planning for your retirement. Especially since that process may be far simpler and cheaper than many individuals realise.
A long-term time horizon
The FTSE 100’s recovery potential may seem limited at present. The world economy is likely to experience a recession this year, and ongoing restrictions on people’s movements could hurt the financial outlooks for many large-cap shares. This may lead to further declines in their price levels in the short run.
However, the stock market has experienced numerous periods of economic decline in the past. It’s always recovered from them to post new record highs. Even if that outcome seemed improbable during the worst parts of its downturns.
A similar outcome is likely in the coming years, with many FTSE 100 companies having the financial strength to overcome the near-term risks they face. Investor sentiment is also likely to improve as the economic outlook strengthens.
As such, building a portfolio of FTSE 100 shares while they trade at low prices could be a sound move if you have a long-term time horizon. A stock market recovery may take place over a period of years, rather than months. But if you’ve sufficient time left until you retire for this process to take place, then you could capitalise on low valuations across the index to generate high long-term returns.
Investing in FTSE 100 shares today
The process of buying cheap FTSE 100 shares may be easier than many investors realise. For example, opening a tax-efficient account, such as a Stocks and Shares ISA, can be completed online in less than 10 minutes. Its annual management charges are often less than the cost of a single trade, which means your costs of investing in shares are likely to be relatively low.
Low sharedealing costs mean diversifying across numerous sectors and geographies is a more achievable goal for a wider range of investors. Diversification reduces overall risk since you’ll be less reliant on a small number of businesses to generate your returns. It may also enable you to access growth opportunities in a wider range of industries that improves your returns.
Certainly, you won’t be able to build a large retirement nest egg in a short space of time. But, with a long time horizon and regular investment, you can generate a surprisingly generous passive income in older age. And that comes through buying FTSE 100 stocks prior to a likely global economic recovery.
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.