When the stock market crashed in March, the FTSE 100 shed 32% of its value. The major sell-off was prompted by the outbreak of Covid-19 and the subsequent economic damage caused. Despite this, global stocks have risen sharply, with indexes in the US even reaching new all-time highs.
While the UK’s blue-chip index has lagged behind its international counterparts, there are palpable fears over a fast-approaching second stock market crash. Regardless of what happens though, I’d stick to a strategy of buying cheap FTSE 100 shares to build a tidy investment pot. Here’s why.
The possibility of a second stock market crash
Nobody could have possibly predicted the sharp rise in global stocks in the midst of a global pandemic and unprecedented economic damage. In the eyes of many, the stock market is simply too high and disconnected from reality, which explains sky-high valuations amid such bleak conditions.
Risks such as a lethal second wave of infections and rising tensions between the US and China remain real possibilities. Either could prove to be the catalyst that prompts a second major-sell in equities in a matter of months.
While this would come as unwelcome news to investors, it could provide a once-in-a-lifetime buying opportunity that would deliver serious returns in the long run. That’s why I wouldn’t fear a second market crash. Instead, I’d see it as an opportunity to load up on discounted shares and hold them for the long term.
Buying FTSE 100 shares while they’re cheap
That said, I wouldn’t pin my hopes on a second market crash. It could be that the much-anticipated major sell-off never occurs. In this scenario, investors would be left kicking themselves for not buying cheap shares while they could. After all, nobody can predict the future of the stock market.
Another thing to remember is the age-old saying that the stock market is not the economy. Asset prices may appear high relative to the health of the economy, but financial markets are notoriously forward-looking.
Above all, time in the market always beats timing the market. With that in mind, I’d still invest in cheap FTSE 100 shares today in order to build capital over time. Hold them for the long term, and your chances of achieving a six-figure portfolio greatly improve.
Evidently, not all companies listed in the index are trading on cheap valuations. This makes it harder to find the right companies to invest in. Moreover, there’s no definitive set of rules for identifying cheap stocks. That said, I’d focus on selecting high-quality companies whose shares appear undervalued. Key metrics to use in determining this include the price-to-earnings ratio and the price-to-book ratio.
Make a million
Once you’ve built a diverse investment portfolio, which includes a handful of undervalued shares, it’s time to sit back and let the wonders of compounding returns do the rest. For example, let’s say you invest £450 a month and manage to achieve an annual return of 8%. After 36 years, your pot would be worth a whopping £1,053,644.
So, regardless of whether a second stock market crash happens, I’d stick to investing in cheap FTSE 100 shares in order to boost my chances of building serious long-term wealth.
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Matthew Dumigan 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