The FTSE 100 crash may have caused some to become wary about investing in the stock market to build a retirement nest egg. However, the index has a strong track record of recovery. And that could make now the right time to buy a diverse range of businesses, and hold them for the long run.
With many companies trading on low valuations, the capital growth potential of the index seems to be high. As such, it could help to improve your financial prospects and may even increase your chances of retiring early.
Buy-and-hold strategy The FTSE 100 may have experienced a rebound following its market crash, but it’s unlikely to produce smooth returns over the coming months. Numerous risks face the world economy, such as the prospect of a spike in coronavirus cases and geopolitical uncertainty surrounding the relationship between the US and China.
As such, investors should be prepared for further difficult periods for the stock market over the medium term. Holding stocks throughout such periods, rather than selling them, could prove to be a profitable strategy. Over the long run, high-quality companies are likely to overcome factors such as weak investor sentiment and slow profit growth to post high returns for patient investors.
FTSE 100 diversification At the present time, many FTSE 100 industries face futures that are difficult to forecast. It’s unclear how consumer behaviour will have changed following the coronavirus pandemic, if indeed it’s changed at all. This may make it difficult for many companies to find the right growth strategies to pursue over the coming years.
Therefore, diversifying across a wide range of sectors and businesses could prove to be a shrewd move. Diversification will reduce risk, since you’ll be less reliant on a small number of companies for your returns. It could also allow you to capitalise on the growth potential of a wider range of businesses than would normally be the case. This could boost your returns and improve your retirement prospects.
Reinvesting dividends A large number of FTSE 100 stocks have reduced their dividends over recent months in response to uncertain operating conditions. As the economic outlook improves, many of them are likely to reinstate their shareholder payouts and return to dividend growth.
It may be tempting to spend the dividends produced by your portfolio at a time when other income-producing assets, such as bonds, offer low returns. But, in the long run, reinvesting dividends is likely to be far more profitable. It will allow compounding to have a larger impact on your portfolio, which could increase its size and make it easier to generate a passive income in retirement. This could bring your retirement date a step closer and improve your financial outlook in older age.
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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.
Motley Fool UK 2020