The FTSE 100 has experienced a rebound over recent weeks that has helped it to recover a large portion of the ground lost in the market crash.
Despite this, the index still contains a number of companies that appear to offer wide margins of safety. Although they may experience challenging operating conditions over the short run, they could deliver successful recoveries over the long term.
As such, buying a diverse range of FTSE 100 stocks could be a sound move in advance of a likely market rally over the coming years.
FTSE 100 valuations
Although the FTSE 100 may have made gains over recent weeks, a number of large-cap shares appear to be trading at attractive prices. For example, sectors such as banking, retail, housebuilding and consumer goods contain high-quality businesses that are trading at a discount to their 2020 starting prices. They have the potential to deliver improving financial performances over the coming years that could catalyse their share prices.
Of course, in the near term, many of those businesses faces challenging operating conditions. Weak consumer sentiment and an uncertain economic outlook may impact negatively on their prospects. But, through buying financially-sound companies while they trade at low prices, you could generate high returns in the coming years as the FTSE 100 recovers.
While there is no guarantee that any FTSE 100 share will recover after its recent decline, the past performance of the index suggests that a market rally is likely.
For example, a rally has occurred after every previous market crash and bear market during the FTSE 100’s 36-year history. Sometimes it has taken the index a matter of months to recover from its downturns, while in other cases it has taken years. However, by investing following a market crash and prior to a market rally – when share prices continue to offer good value for money – it is possible to benefit from improving investor sentiment and growing bottom lines.
Through diversifying across a wide range of sectors, you can increase your chances of taking part in the likely FTSE 100 rally over the coming years. Diversifying may reduce your exposure to sectors that continue to struggle, and also broaden your capacity to benefit from surprising growth prospects in a range of industries.
A simple and effective means of capitalising on the FTSE 100’s recovery potential is through opening a Stocks and Shares ISA. They are cheap to set up and can be completed in a matter of minutes online. They offer tax efficiency, and could help you to build a larger nest egg over the long run compared to a bog-standard sharedealing account. Doing so may boost your financial prospects and allow you to benefit from the FTSE 100’s long-term recovery potential.
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.