The FTSE 100’s recent market crash could yet see a second act. The index may have rebounded from its decline in February/March, but the economic outlook continues to be highly uncertain.
However, investors who adopt a buy-and-hold strategy over the long run could capitalise on the bargain valuations still on offer across much of the FTSE 100.
Certainly, share prices may move lower in the short run. But buying cheap shares today and holding them for a period of 10 years or more could produce high returns that boost your financial prospects.
FTSE 100 buy-and-hold strategy
A buy-and-hold strategy has historically been a successful means of taking advantage of the FTSE 100’s long-term growth potential. For example, buying a diverse range of shares while the index was at 1,000 points in January 1984 and holding them to the present day would have produced an annualised total return of around 8%.
During that time, of course, the index has experienced periods of gains and losses. Some investors may have enjoyed success in timing their purchase and sale decisions so that they buy stocks when they are cheap and sell them when they are trading at a much higher level. But achieving that goal on a consistent basis over many years requires skill, dedication and luck.
Therefore, buying high-quality FTSE 100 businesses when they are attractively priced and allowing them the time they need to deliver on their strategies and benefit from improving investor sentiment could be a means of generating high returns in the long run.
Clearly, the FTSE 100 offered better value for money in March than it does today. Back then the index was trading below 5,000 points, with many of its members having valuations that were last seen during the financial crisis.
However, the index continues to offer a wide margin of safety even after its rebound. Investors seem to be pricing in a difficult period for the world economy, which could mean that there are favourable risk/reward ratios on offer across many of the index’s sectors.
Therefore, there appear to be buying opportunities for investors who have a long-term time horizon. In many cases, undervalued shares in the FTSE 100 have solid balance sheets and sound strategies but face uncertain operating conditions. They could be among the most attractive stocks to buy, since they are likely to survive any recession and may even be able to strengthen their market positions.
Building a portfolio
Diversifying your portfolio could prove to be highly beneficial over the next decade. It is too soon to know with a high degree of confidence which FTSE 100 sectors will recover quickly from the coronavirus lockdown, and which industries will continue to experience slow growth.
Therefore, spreading your risk across many companies and sectors could be the best means of enjoying the likely market rally and high returns on offer from the FTSE 100 over the next 10 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.