Making a million from the FTSE 100 may seem like an unlikely prospect after the index’s recent market crash. Although it has rebounded following its decline, it continues to trade significantly below its 2020 starting price.
However, its long-term prospects could be much more attractive than those of other popular assets, such as Cash ISAs and buy-to-let properties. As such, now may be the right time to build a portfolio of large-cap shares to increase your chances of obtaining a seven-figure portfolio.
An uncertain outlook
The FTSE 100’s uncertain outlook may naturally cause investors to pivot towards Cash ISAs and buy-to-let. After all, no losses will be experienced through Cash ISAs (provided you have less than £85,000 held at each banking group), and bricks-and-mortar has a long history of growth due to low supply and high demand.
However, the prospects for generating high returns on either asset may be more limited than many investors realise. For example, a sharp economic contraction may mean that the UK requires a low interest rate for a number of years. The global financial crisis showed that even as the economy recovers, the path to a higher interest rate can be exceptionally slow. Therefore, negative after-inflation returns may be ahead for Cash ISAs.
Similarly, the FTSE 100 could offer higher returns than buy-to-let properties. Affordability is likely to be a major concern for many would-be homebuyers. Rising unemployment and weak wage growth could offset lower interest rates to produce lower demand at current price levels. This may mean that house prices need to fall, or at least experience a period of slower growth, to make them more affordable.
Investing in the FTSE 100 today
Some investors may feel that waiting for the FTSE 100 to fully rebound before buying shares is a better idea than purchasing stocks today. However, a rebound means that share prices will be higher than they are at the present time. Therefore, investors may miss out on potential gains that make it more difficult for them to generate a seven-figure portfolio.
A more logical approach may be to buy financially-sound businesses today while they offer wide margins of safety. In many cases, investors have factored-in risks facing companies in many sectors. This could mean that they are undervalued, and that they gradually return to valuations more in keeping with their historic averages.
Certainly, the FTSE 100 may be significantly more volatile than buy-to-let investments or, especially, Cash ISAs. Risks remain in place that could negatively impact investor sentiment and operating conditions for many businesses. However, the index has the potential to produce high single-digit returns per year over the long run, which may make it the most effective means of obtaining a portfolio valued at over £1m in the coming years.
