Investing £1k, or any other amount, in bargain FTSE 100 shares could be a worthwhile move for long-term investors. The index has the potential to deliver above-average returns due to many of its members currently trading on relatively low valuations that are unlikely to persist over the long run.
At a time when other assets may fail to produce the returns needed to transform your capital into a viable retirement nest egg, buying a range of UK shares could be an attractive proposition that helps you to retire early.
FTSE 100 return potential
The FTSE 100 has risen from 1,000 points at its inception in January 1984 to trade at over 6,000 points today. Including dividends, that equates to an annualised return in excess of 8%. Such a return on £1,000 invested over a long time, such as 40 years, would lead to a portfolio valued at nearly £22,000.
Clearly, building a retirement portfolio will require an investment greater than £1,000 to provide a passive income in older age. However, the example serves to show that investing even modest amounts of money in the index and providing it with the opportunity to compound can lead to surprisingly large nest eggs.
Investing in FTSE 100 shares today could produce even higher returns over the coming years than has been the case in its past. The index may have returned 8% per year over the last 36 years, but its progress has not been smooth. At times, it has declined sharply. In other periods, it has made very strong gains.
Investing during the former may allow you to benefit to a greater extent from the latter. In other words, a strategy that seeks to take advantage of the index’s current low valuations through buying bargain shares may lead to higher capital returns.
For example, FTSE 100 sectors such as banking, retail, resources and many others currently contain high-quality businesses that trade well below their price levels from six months ago in many cases. Although they may take time to recover, buying them now may enable your portfolio to ride a wave of recovery over the coming years as fiscal and monetary policy stimulus has a positive overall impact on asset prices.
Seeking to retire early through buying FTSE 100 shares has been a common strategy for many investors over recent decades. However, it is likely to become increasingly popular as low interest rates cause the return prospects for cash and bonds to decline, while high house prices may limit the returns available on buy-to-let properties.
As such, now could be the perfect time to start buying bargain UK shares. They could produce high returns that improve your portfolio’s performance in the coming years and increase the chances of your being able to retire early.
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.