After declining by around 8% since the start of the year, the FTSE 100 now trades at its lowest level since January 2019. The speed of its fall in recent days is likely to have caught many investors by surprise. However, its declines have often been faster than its gains in bygone years.
Looking ahead, further falls would be unsurprising in the short run. However, history shows that such periods can prove to be buying opportunities for long-term investors.
Potential challenges
The full scale of the impact of coronavirus on the world economy is still a ‘known unknown’. Its impact on company earnings is gradually becoming clearer, with weak consumer demand in China and the restricted supply of a variety of products from the world’s second-largest economy causing many businesses to report a slowdown in sales.
This situation could continue for as long as coronavirus remains a threat to the world economy. Investors may continue to price-in a global economic slowdown – especially since the upcoming US election may add an extra layer of concern to the views of many investors.
Buying opportunity
Buying shares right now may seem like an unwise move. After all, they could easily fall further in the short run if the coronavirus outbreak fails to be contained.
However, a number of companies now appear to trade on low valuations given their long-term growth potential. Certainly, they may become even cheaper in the near term. But their risk/reward ratios seem to be favourable, and in many cases, investors may have factored-in further challenges for the world economy.
Previous stock market crashes have caused significant pain and worry for investors in the short run. The global financial crisis, for example, caused the FTSE 100 to halve in value. However, it recovered in subsequent years – just as it has done following every other period of decline in the past. As such, investors who can identify high-quality companies and buy them at relatively low valuations may be handsomely rewarded in the long run.
A fixed strategy
One of the challenges in buying shares during a market crash is overcoming your emotions. It is natural to feel fearful about the potential for losses due to the risks facing the wider economy.
However, by having a fixed strategy in place that focuses on the long term, diversifies across a number of stocks, and sticks with the concept that buying undervalued shares has historically yielded high returns, you can overcome the inertia that often results from a market crash.
In doing so, you may find that in a few years’ time, your portfolio valuation is relatively healthy and the current downturn in the stock market’s performance proves to be a temporary drop in its long-term growth towards new record highs.
