Which shares should we buy in the 2020 stock market crash? I’d suggest taking advantage of low prices and investing for the long term. In this article I’ll explain how and why.
It is widely thought that growth stocks are the smartest option during a downturn. They tend to outperform when industrial companies, banks and other cyclicals do the opposite. This is a view held by financial giants such as Goldman Sachs.
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The 2020 stock market crash was unprecedented. It led to a surge in demand for grocery delivery services, video games and cloud usage. However, the big question remains if that demand can last long. Everyone expects the lockdown in the UK to end next month. Even though I believe there may be a second Covid-19 wave, it will not last forever. So, the demand for ‘lockdown’ services mentioned above could recede, putting pressure on growth companies’ earnings and stocks.
How does this affect our investing decisions? An example of a company benefiting from the lockdown seems to be Ocado that offers grocery delivery services. Yet the firm’s fundamentals are not very appealing to me. The shares appreciated dramatically between March and May, but its earnings record is not impressive at all. 2019 was loss-making for Ocado, even though its revenue surged.
Free from worry
I feel the safest option would be to invest in a FTSE 100 index tracker that includes a large variety of companies in different sectors. On average the return of such a tracker is about 8% per year. Most index funds provide the opportunity to reinvest dividends and to apply a pound-cost-averaging method. This involves investing a fixed amount of money, say every month. Such a method would allow you to avoid investing your entire savings just before a stock market crash. But do think carefully as investing in a FTSE 100 tracker would also mean buying loss-making companies that have slashed their dividends, such as IAG, easyJet and Carnival Corporation.
I fully agree with my colleague Matthew Dumigan that it’s essential to invest for the long term. To make the most of this approach, you might want to buy shares of large cyclical companies. My favourite firms to buy and hold for the long term are Legal & General, Lloyds and Rio Tinto. All of them have low price-to-earnings (P/E) ratios and are not overvalued. Moreover, they have high credit ratings that reflect their healthy balance sheets and cash flow positions. I feel they have strong future prospects.
But their cyclicality means they could have downs as well as ups. Financial companies will most probably face short-term profitability pressure. So investing in Legal & General and Lloyds might lead to temporary losses. Rio Tinto is a mining company that extracts iron ore, copper and other metals. Given that the Covid-19 crisis led to a fall in manufacturing activity and a fall in demand for these materials, Rio’s sales revenue will stay under pressure for some time. However, the current downturn will pass. Given that these companies are financially sound and cheap, they will likely allow you to outperform an index fund.
But many roads lead to Rome and there are more alternatives available to you if you’d like to invest for the long term.