Why I’d buy cheap FTSE 100 stocks in a market crash

The FTSE 100 (INDEXFTSE:UKX) offers long-term growth potential, in my opinion.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Having experienced a decade-long bull market, some investors may feel the FTSE 100 is likely to record less favourable returns in the coming years. Furthermore risks, such as the spread of coronavirus, geopolitical challenges in the Middle East and Brexit, may cause investor sentiment to weaken in the coming months. This could lead to a challenging period for the stock market which ends in a market crash.

While this possible outlook may cause some investors to become increasingly cautious and seek relative safety in lower-risk assets, such as cash, it could in fact prove to be a worthwhile buying opportunity.

A track record of recovery

The FTSE 100’s past performance shows it’s a cyclical index which experiences booms and busts. Throughout its history, it’s always fallen following bull markets, only to successfully recover from subsequent bear markets to post new record highs.

As such, buying during uncertain periods could prove to be a sound move. Not only does the index have a solid track record of recovering from its low points, investors may be able to make strong long-term gains as a result of purchasing stocks while they trade on low valuations.

In many bear markets in the past, notably during the financial crisis, the valuations of a range of high-quality businesses were exceptionally low. Investors, it seemed, were preparing for a prolonged period of depression which never came. Therefore, capitalising on the fears of other investors and buying during a market crash can prove to be a highly profitable move.

Fundamental focus

Of course, being selective in terms of the companies you purchase during a market crash is also a worthwhile move. Seeking companies with strong balance sheets and robust cash flow can help to reduce your overall risk, since they may have a better chance of reporting resilient financial performances during a challenging economic period. They may also offer a stronger recovery outlook, since they may be in a position to invest in other businesses or new market segments while valuations are low.

Additionally, buying shares with affordable dividends could be a good idea. They may be less likely to cut their shareholder payouts than companies which have less headroom when making dividend payments. Since a large proportion of the FTSE 100’s historic returns have been derived from the reinvestment of dividends, income shares may produce surprisingly high total returns – especially when purchased while they offer higher yields during a market crash.

Ignoring market ‘noise’

Perhaps the most difficult part of buying stocks during a market crash is ignoring the opinions of other investors. Panic can easily set in among commentators and investors, which may cause you to become less positive about the long-term prospects for the wider market.

However, by focusing on the fundamentals of specific businesses and recalling that the FTSE 100 has always recovered from its various crises, it’s possible to capitalise on the next market crash – whenever that occurs.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »