Investing £5,000, or any other amount, in FTSE 100 shares might seem like a daunting prospect for many investors. After one of the longest bull markets in history, the index suffered its worst crash on record in March.
To complicate matters, some FTSE 100 shares are faring much better than others in the current economic climate.
However, while this volatility and complexity might scare some investors, it’s difficult to argue with the index’s long-term performance figures. The FTSE 100 has produced an average annual return of around 8% for investors since its inception in the 1980s.
Therefore, while the short-term outlook for the index might be difficult to predict, its long-term growth potential appears exceptionally high. That’s why it could be worth considering buying FTSE 100 shares for your portfolio today.
The outlook for FTSE 100 shares
As mentioned above, the outlook for FTSE 100 shares is cloudy right now. The UK economy has suffered one of its worst economic slumps in history. GDP declined a record 20% in the month of April, and figures suggest unemployment has reached record levels as well.
As such, it appears many sections of the economy are in for a protracted period of economic pain.
Against this backdrop, investors may wish to buy companies that have a high chance of surviving this period of extended uncertainty. FTSE 100 shares with low levels of debt, defensive business models, and the capacity to cut costs may be better positioned to overcome risks in the short term.
It could also be sensible to avoid any companies that rely on hospitality or travel markets. A second wave of coronavirus could force countries to shut their borders once again. This would inflict further pain on an already damaged sector.
Value for money
However, sectors that face uncertain futures could also offer the best value for money. Investors have been quick to mark down the value of FTSE 100 shares in companies with challenging outlooks. This may provide new investors with a wide margin of safety that gives an enhanced risk-reward profile. In some cases, this margin of safety may more than make up for the uncertainty facing a particular business.
It’s essential to evaluate each business on its own individual merits, strengths, and weaknesses. The best way to do this is to look through group annual reports, or use one of the many online resources available that profile companies’ financial position and strengths. This is the best way to make sure your investment has the financial capacity to ride out the current economic uncertainty.
Buy for the long term
Investors with a short-term focus have been quick to sell FTSE 100 shares over the past few months. This may mean that buying high-quality businesses at attractive prices today could benefit investors with a long-term time horizon.
Rupert Hargreaves 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.