Buying FTSE 100 stocks in an ISA today may not seem to be a sound means of building a retirement savings portfolio. There continues to be the potential for a decline in stock prices over the coming months. That’s due to risks, such as a second wave of coronavirus and declining consumer sentiment, likely to hold back investor sentiment to some degree.
However, now could be the right time to build a diverse portfolio of FTSE 100 shares while they offer wide margins of safety. Over time, they could deliver strong total returns. And that could help you retire with a generous nest egg through which to earn a growing passive income in older age.
Margin of safety
Many FTSE 100 shares seem to offer wide margins of safety at present. This could make it a worthwhile time to buy them, since the risk/reward ratios they offer may prove to be highly attractive.
History has shown that buying assets for less than they’re worth, and holding them for the long run, can be an effective means of generating relatively high returns. In many cases, FTSE 100 companies are among the strongest and most likely to survive within their respective industries.
Therefore, they’re likely to take part in a long-term recovery, with investors who buy them at a discount to their intrinsic value likely to be among those who benefit the most in the coming years.
Wide margins of safety across many FTSE 100 sectors don’t occur frequently. In fact, the last time a number of sectors, including financial services, retail and travel, traded on such low price multiples was during the global financial crisis.
Buying them in 2009 led many investors to generate high returns in the long run. And there’s currently the potential for a similar outcome to occur as the world economy returns to growth.
Building a FTSE 100 retirement portfolio
Taking advantage of the FTSE 100’s wide margin of safety is relatively straightforward for investors, thanks to online sharedealing. Opening a tax-efficient account, such as a Stocks and Shares ISA, can be completed online in a matter of minutes, with a wide range of providers offering them.
Low dealing charges through regular investing services, available at most large providers, make the purchase of a diverse range of businesses accessible to most investors.
Clearly, investing in the FTSE 100 may not produce a worthwhile retirement nest egg within the next couple of years. Risks are likely to persist, while investor sentiment could be exceptionally volatile.
But for those investors who are seeking to build a retirement savings account over the long run that will eventually provide them with a passive income in older age, FTSE 100 stocks now seem to offer a relatively attractive opportunity to do so.
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.
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