Buying FTSE 100 shares while a second stock market crash and a prolonged recession are possible could be seen as a risky move. Certainly, it could mean that there are paper losses ahead for investors as share prices react to what may prove to be an extended period of disappointing macroeconomic news.
However, investing when risks are high could be a means of accessing lower valuations that produce stronger returns over the long run. With the stock market having a solid track record of recovering from its very worst downturns, buying stocks now could be a profitable long-term move.
An uncertain outlook
The FTSE 100’s price level could come under further pressure in the coming months. It may even experience a second stock market crash as the economic effects of a period of lockdown become clearer.
While falling stock prices may cause paper losses for investors, they also present the opportunity to buy high-quality businesses when they offer good value for money. Historically, a strategy that focuses your capital on undervalued stocks has been highly successful. Therefore, long-term investors who do not need to sell their holdings in the short run can benefit from temporary mispricings that allow them to obtain more attractive risk/reward ratios.
FTSE 100 valuations
Of course, the prospects for the economy are a known unknown. It could experience a period of prolonged difficulty, or it may produce a quick recovery.
As such, buying FTSE 100 shares today could be a shrewd move. Many companies currently trade at prices that suggest that investors have factored-in a period of intense economic difficulty. Some of the index’s members have valuations that are significantly below their long-term averages. This means that, while they may not be immune to a weakening economic outlook, they may already offer wide margins of safety that lead to impressive returns as the world economy recovers in the long term.
The FTSE 100 has a long track record of recovering from its worst crashes and recessions. For example, it started life at 1,000 points in 1984. Since then it has experienced the 1987 crash, the dotcom bubble and the financial crisis, as well as many other corrections and downturns. Yet when dividends are included, it has produced a high-single-digit return since inception. This is significantly higher than other mainstream assets over the same time period.
Therefore, the index seems likely to recover from its present economic challenges to post encouraging growth over the coming years. Through buying stocks today while they are cheap, and even adding to them should there be a further market crash, you can access attractive opportunities that could catalyse your portfolio’s performance. Doing so may produce paper losses in the short run, but for long-term investors it could be a highly profitable plan.
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.