The FTSE 100’s market crash has caused many of its members to trade at cheap share prices. And there is scope for them to move lower in the short run too. But in many cases, investors seem to have priced-in potential economic difficulties.
This could enable long-term investors to buy high-quality businesses while they offer wide margins of safety ahead of a likely recovery. When bought via a tax-efficient account such as a Stocks and Shares ISA, you could increase your chances of making a million.
The FTSE 100 currently faces numerous short-term risks that could hurt its progress after its recent rebound. For example, as lockdown measures in many counties are lifted, a second wave of coronavirus could still happen. And remember, the pandemic may have caused tensions between the US and China to increase. This could lead to further negative developments in their ongoing trade war.
However, investors appear to have factored-in many of the risks facing the FTSE 100 at the moment. The index currently trades around 20% lower than it did at the start of the year. And many of its members have valuations that are significantly below their long-term averages. As such, investors can build a diverse portfolio of stocks that has the potential to deliver a sound recovery over the coming years.
FTSE 100 recovery prospects
A common theme during the FTSE 100’s various bear markets since its inception is that a recovery seemed improbable at the time. Remember the 1987 crash, the 2003 tech bubble and the 2009 financial crisis? The outlook for the index was highly challenging each time. Most investors were of the view that things would worsen before they improved.
However, in the months and years following each of those crises, the FTSE 100 went on to deliver a successful recovery. Not only that, it produced exceptional returns for many investors. Yes, fear may currently be the dominant emotion among investors. But it is very likely to give way to optimism and higher stock prices. Buying cheap FTSE 100 stocks today and holding them even if the economic outlook deteriorates in the short run could be a means of improving your chances of making a million as the index gradually recovers.
Buying stocks in a tax-efficient account such as an ISA could further your potential of obtaining a seven-figure portfolio. No capital gains or dividend tax is paid within an ISA and this could lead to lower tax bills in the long run. This is especially so as tax rises may become more common in future as the cost of the coronavirus pandemic becomes clearer.
Therefore, now could be the right time to open an ISA and start buying cheap FTSE 100 shares ahead of a long-term recovery. Doing so could help you to make a million from the stock market in 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.