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The FTSE 100’s 14% crash may not be over. But I’d still buy cheap stocks in an ISA today

Peter Stephens
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The FTSE 100 continues to experience a decline that has seen over 14% of its value wiped since the start of the year. The end of its current downturn does not appear to be in sight, with investor sentiment weakening as the total number of coronavirus cases increases.

Buying FTSE 100 shares today, therefore, could realistically lead to paper losses in the short run. However, the index’s value suggests that it is very cheap at the present time, while its track record of recovery indicates that it may produce a successful turnaround in the long run. As such, now could be an opportune moment to buy a diverse range of large-cap shares.

Impossible forecasting?

Trying to buy at the bottom of the FTSE 100’s current decline may be an impossible task. Nobody knows how severe the coronavirus outbreak will ultimately prove to be. Neither can anyone say how negative its impact will be on the world economy.

Therefore, trying to anticipate when the FTSE 100 will start to recover is likely to be a guessing game that requires a large amount of luck.

By contrast, focusing on the valuation of the index and comparing it to past levels is a more precise process. The FTSE 100 currently has a dividend yield of over 5%. The last time it reached such a level was during the global financial crisis, with that being the only period during which it has had such a high yield since its inception in 1984.

A 5%+ yield suggests that the index is cheap at the present time relative to its historic levels. And while it may become even cheaper, buying high-quality shares while they offer good value for money has generally led to strong returns in the long run.

Recovery potential

Of course, there is no guarantee that the FTSE 100 will ever recover from its recent crash. However, its track record suggests that it is very likely to record new highs over the coming years as investor sentiment and the performance of the world economy recovers.

In fact, the index has experienced worse crashes than its recent fall. The 1987 crash and the global financial crisis were extremely challenging periods for the FTSE 100 and the world economy. Yet over time, it delivered a successful turnaround, and investors who bought high-quality stocks while they offered good value for money were generally rewarded.

Certainly, they may have experienced a period of paper losses if they bought before the bottom of the index’s fall. But in the long run, buying FTSE 100 stocks while they are cheap has produced high returns for investors.

Therefore, things could get worse before they improve for the FTSE 100. But for long-term investors, the index’s valuation and track record suggest that today could be a buying opportunity after its recent decline.

The post The FTSE 100’s 14% crash may not be over. But I’d still buy cheap stocks in an ISA today appeared first on The Motley Fool UK.

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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