The natural response of any investor to the FTSE 100’s recent market crash is to await a period of calm before investing £10k, or any other amount, in equities. After all, no investor wants to buy stocks today and experience paper losses in the short run.
However, it is while the stock market faces its greatest risks that many of its best buying opportunities appear. Through focusing your capital on high-quality businesses that trade at low prices, you can build a surprisingly large nest egg that may help you retire early.
FTSE 100 outlook
Many investors seek to buy FTSE 100 shares when they are trading at low prices so they can sell them at significantly higher prices further down the line. Many of the periods when stocks are at their lowest levels coincide with times when risks are at their highest. For example, many large-cap shares have crashed over recent months in response to challenging economic prospects for the UK and the rest of the world.
While this may mean that buying shares today can produce paper losses in the short run, it also presents a buying opportunity for long-term investors. Over time, the index and its members are likely to recover from the current challenges they face. As such, long-term investors who can look beyond short-term risks may be able to implement a buy low/sell high strategy in order to improve their chances of building a large nest egg for retirement.
Boosting your returns
As well as having the self-discipline to buy FTSE 100 shares while they are trading at low price levels, investors can boost their returns through buying them in an ISA. A Stocks and Shares ISA offers tax efficiency, in terms of no tax being charged on the gains (dividends and share price growth) for the investments held and withdrawals. That could make a positive impact on your overall portfolio size in the long run.
Furthermore, investors who focus their capital on those companies with solid business models and sound finances may be able to generate higher returns over the coming years. Such companies may be in a better position than their peers to take advantage of weaker market conditions to expand their presence. For example, they may have the financial strength to make acquisitions while asset prices are low to expand their profit potential over the long run.
With interest rates being low and house prices appearing to be overvalued versus average incomes, FTSE 100 shares could become increasingly popular among a wider range of investors. This may increase demand for high-quality businesses, and help to push their share prices even higher as the index recovers from its recent crash.
This may take months, or even years, to occur. However, it has the potential to catalyse your retirement plans, and could even help you 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.