The FTSE 100 has fallen by around 1,000 points since the start of 2020. While this may be disappointing for investors due to the paper losses they are experiencing, history shows that buying stocks following a market correction can be a worthwhile move. It allows you to capitalise on lower valuations, with the track record of the FTSE 100 showing that it has always posted a recovery following its corrections.
Of course, focusing on companies that offer solid fundamentals, dividend potential, and a track record of resilient financial performance could be a profitable move. Buying them through a tax-efficient account such as a Stocks and Shares ISA may further enhance your gains in the long run.
Solid fundamentals
Investing in the FTSE 100 today could come with some risks, of course. The index could fall further as investors price in the heightened risks facing the world economy. The coronavirus has caused disruption to demand and supply chains that could continue for a while, and political risks in the UK and US may increase throughout the rest of the calendar year.
Therefore, buying shares with solid fundamentals could be a logical step for investors to take. For example, assessing a company’s debt levels, the affordability of its interest payments compared to profit, and the strength of its free cash flow may provide guidance on how easily it can overcome a potential economic downturn.
Sector allocation
Furthermore, buying stocks that have been able to cope with past periods of difficulty in the wider economy may reduce your overall risk. This may mean that you focus your capital on companies that have wide economic moats, in terms of a loyal customer base or efficient business model, as well as businesses that operate in sectors that are less dependent on the wider economy than many of their index peers.
For example, healthcare companies may be impacted to a lesser degree by an economic slowdown than cyclical growth stocks. Meanwhile, financial services companies trade on low valuations in many cases. This suggests that investors have priced-in their potential risks. And while sectors such as consumer goods and retail may experience a slowdown in the near term, over the long run, the growth potential of emerging markets could catalyse their financial performance.
Long-term focus
Even if you are able to identify great businesses that are trading on low valuations, they could continue to deliver declining share prices in the short run. Investor sentiment is extremely fragile at the present time, and could weaken significantly in a short space of time.
Therefore, investing with a long-term view seems to be a shrewd strategy to adopt. Previous crises have proved to be buying opportunities for long-term investors. While the coronavirus could continue to negatively impact on the world economy over the coming months, it may prove to be another opportunity for investors to buy high-quality businesses at low prices.
