Investing in the FTSE 100 after its recent crash might seem like a risky idea. However, over the long run, the index has proven to be an essential tool for creating wealth.
So, while the UK’s leading blue-chip index might suffer further declines in the short run, investors who have a long-term time horizon may benefit from the index’s relatively high returns. It could even help you retire early from a standing start at 50 years of age.
Retire on the FTSE 100
The FTSE 100 has been around since the mid-1980s. During this time, the world has been through many economic booms and busts. On some occasions, the index has lost nearly 50% of its value as investor sentiment has collapsed.
However, despite these peaks and troughs, the blue-chip index has achieved an average annual return of 8% since its inception. That’s significantly higher than the interest rates offered on most savings accounts today.
As such, setting up a monthly investment plan in the FTSE 100 could help you build a sizeable financial nest egg and retire early.
Most online stockbrokers offer a monthly investment plan today, some from as little as £25 a month. These regular investment plans allow you to pick one, or a selection of investment funds to buy every month via direct debit. Once the funds are selected, all you need to do is sit back and relax. It is as easy as that.
A simple FTSE 100 tracker fund could allow you to track the index with no extra effort. This may be the best way to invest in the FTSE 100 and build a retirement fund.
Buying the index as a whole removes the risk of making a bad investment and provides a high level of diversification. What’s more, the fund tracks the index for you. The fund’s managers buy or sell companies if they are added to or removed from the index.
Using the FTSE 100, it could be straightforward to build a large pension pot in a short time frame. For example, an investment of £5k a month for 10 years may grow to be worth nearly £1m. That could be enough to provide an annual income of £50k in retirement.
There are other options available to grow your nest egg faster. Some FTSE 100 stocks have produced double-digit returns over the past few years.
At an annual growth rate of 10% per annum, it would take monthly deposits of £4,500 to build a £1m pension pot. Buying high-quality companies with strong balance sheets, at low valuations may be the best way to profit using this strategy.
So, while buying the FTSE 100 right now might seem like a risky prospect, investors should focus on its long-term potential. Over time, owning the index could transform your retirement prospects and help you to retire with a larger pension pot.
If you want to buy individual stocks to improve your retirement prospects, we have some ideas.
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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.