Investing £10k, or any other amount, in FTSE 100 shares in an ISA today may seem to be a hugely difficult task for many investors. After all, the index experienced one of its fastest-ever crashes in the first part of 2020, and that was followed by a rebound. Confused? Possibly.
You see, the index’s next move may be difficult to predict. But its long–term growth potential appears to be high. Therefore, focusing your capital on high-quality businesses in sectors with growth potential could be a sound means of increasing the value of your Stocks and Shares ISA over the coming years.
High-quality FTSE 100 stocks
The near-term prospects for the economy continue to be unclear. Unemployment has risen significantly following the lockdown, while consumer confidence is at a relatively low level. As such, a recession seems likely – and could last for a number of months.
Therefore, investors may wish to buy companies that have a high chance of surviving a prolonged period of lower sales. For example, businesses with low debt levels, a large amount of cash and the capacity to cut costs may be in a better position to overcome the short-term risks they face than their peers.
Fortunately, assessing the financial strength of FTSE 100 companies is relatively straightforward. Through obtaining their annual reports and investor updates for free online, you can build a picture of their financial position and whether they are likely to emerge from a recession in a strong position relative to their peers.
Assessing the growth potential of a specific FTSE 100 industry is likely to be more challenging than considering a company’s financial strength. It is still too early to know whether some industries are likely to return to growth rates seen before the current crisis, or whether there have been permanent changes to consumer spending.
However, those sectors that have uncertain growth rates could offer the best value for money. Investors may have factored-in their challenging outlooks through lower share prices. This may provide new investors with a margin of safety that enhances their risk/reward opportunity. As such, it could be a sound move to not only assess the growth potential of an industry, but to consider whether its current valuations fully reflect its risks and potential rewards.
A long-term focus
The FTSE 100 could experience a strong rally or a market crash in the short run. As such, it is crucial to take a long-term approach when buying shares at the present time. It may take a number of years for some companies to recover from the current challenges they face, which could mean that investors with a short-term time horizon miss out on their full potential.
Through buying high-quality businesses with long-term growth potential at attractive prices, you could build a surprisingly large ISA that boosts your financial prospects 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.