Investing your full annual ISA allowance of £20,000 in FTSE 100 shares may not necessarily produce high returns in the short run. The index’s recent performance suggests that it could experience a volatile period – especially since risks such as a second wave of coronavirus remain in place.
However, over the long run, buying FTSE 100 shares while they offer margins of safety could be a means of producing impressive growth rates. It could even help to make you a million at a time when few other mainstream assets offer attractive risk/reward opportunities.
FTSE 100 margin of safety
The FTSE 100 continues to trade significantly down on its 2020 starting price despite its recent rebound. This could be an opportunity for investors with a long time horizon to capitalise on low valuations across the index. Many sectors, including banking, retail and resources contain high-quality businesses that are facing the prospect of weak operating conditions. As such, they may offer margins of safety that produce favourable risk/reward opportunities.
Since the index has a sound track record of recovering from every one of its previous downturns, buying undervalued shares could be a sound move. It may allow you to capitalise on the volatile nature of the stock market to buy businesses when they are trading at low prices, and sell them when they occupy higher price points.
Many FTSE 100 companies may not offer an especially attractive income opportunity in the short run. An uncertain economic outlook means that some companies have cancelled dividends, while others may be slow to raise them.
However, over the coming years, dividend shares could become increasingly popular. Low interest rates are set to make it increasingly challenging to generate a worthwhile passive income from your capital. This could boost demand for high-yielding stocks, as well as those companies that are able to post rising dividends in the coming years. The end result could be rising stock prices that further enhance your portfolio’s valuation.
As well as focusing on FTSE 100 stocks that offer margins of safety and dividend potential, investing in financially-stable companies could be a sound move. The economy is likely to be in a recession for at least part of 2020, which could mean that only the strongest businesses survive. Therefore, taking the time to assess a stock’s balance sheet and economic moat before buying it could be extremely effective in avoiding losses and making stronger gains.
Of course, a weak economic outlook means investor sentiment could shift rapidly. Therefore, there could be difficulties ahead for investors. But by adopting a long-term time horizon and buying high-quality income shares at low prices you can increase your chances of obtaining high returns. It may even lead to a seven-figure portfolio 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.