Investing £500, or any other amount, in a Stocks and Shares ISA on a regular basis may seem unwise after the FTSE 100’s recent market crash. Although the index has rebounded from its first quarter lows, it continues to trade around 20% down on its price level from the start of 2020.
Moreover, the index faces a highly uncertain period. And that could cause many investors to decide on lower-risk opportunities, such as a Cash ISA.
However, by investing regularly in high-quality FTSE 100 stocks over the long run in a tax-efficient account such as an ISA, you could significantly improve your financial outlook.
FTSE 100 diversification
Perhaps the most important step to take when buying FTSE 100 shares is to diversify. At present, it’s difficult to know exactly what the post-coronavirus economy will look like. Consumer habits may have changed forever. Or they may quickly return to their previous trends.
Therefore, investors should buy a range of companies that operate in multiple industries. That way they can reduce their risk of buying companies that have outdated business models.
Likewise, buying stocks that operate in different economies could be a shrewd move. Some countries may be hit less hard by coronavirus than others. That could mean having exposure to a range of regions helps to reduce your overall risks and improves your long-term returns.
Investing in FTSE 100 companies with strong balance sheets and solid market positions could enable you to capitalise on the index’s likely rebound. They may be well placed to survive a period of lower sales and profitability. That could help them to extend their market positions at the expense of weaker rivals.
Through analysing company accounts and assessing areas, such as debt levels, interest cover and free cash flow, it’s possible to determine which businesses may be relatively strong. They may trade on premium valuations as a result of their relatively stable outlooks. But paying a higher price for a quality business could be worthwhile in the long run, due to its capacity to deliver higher returns.
A long-term outlook
Investing regularly in FTSE 100 shares can be a disheartening experience if they experience difficult periods. With the world economy facing a major recession, it would be unsurprising for investors to experience paper losses in the short run.
However, maintaining a regular investment during such periods can improve your returns. It allows you to buy stocks while they trade on even lower valuations. And that can lead to higher capital growth over the long run.
The FTSE 100 has always recovered from its downturns to post new record highs. So adopting a long-term outlook for your portfolio’s returns could enable you to more easily capitalise on challenging periods.
History has shown that they’ve usually been the most logical times to buy high-quality businesses.
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.