Investing any money after the recent stock market crash might seem like a risky bet for many investors. Indeed, the coronavirus crisis is still rumbling on, and we don’t know how badly the crisis will affect the economy in the short term.
The market has recovered steadily from its March lows over the past few weeks, but we might see another downturn in the near term if there’s a second virus wave.
However, the economy has been through many tough periods in the past. On every occasion, it’s recovered gradually over the next few years. The stock market has generally benefited from this revival.
With this in mind, I’ve been using the current stock market crash to increase my portfolio. Some stocks are much more appealing than others.
Buying in the stock market crash
As noted above, uncertainty stalks the market right now. As such, it’s a difficult time for investors. Some companies may not survive the coronavirus crisis. On the other hand, some may come out of the crisis much stronger than they went in.
Picking the companies that will emerge stronger is the hard part. Defensive businesses with strong balance sheets and large profit margins may be best positioned to weather the stock market crash. Meanwhile, cyclical firms and businesses with weak balance sheets are likely to suffer significantly.
To further reduce risk, it may be best to own a diverse portfolio of defensive businesses. This will allow you to profit for any upside while minimising downside risk. If one company in the collection fails, there will be plenty to take its place.
This might not be the right approach for everyone. Picking stocks can be a challenging and time-consuming process, especially in a stock market crash. Even the professionals get it wrong on a regular basis.
Therefore, if you’re not willing to pick individual companies yourself, the best approach may be to buy a low-cost index tracker fund.
Funds for diversification
These funds simply buy-and-hold the market. This means you can benefit from any upside and, because the portfolio is well-diversified, the downside risk is minimised.
The FTSE 100 and FTSE 250 are both great indexes to track. The FTSE 250 has a domestic focus, while more than two-thirds of the FTSE 100’s profits come from outside the UK. This suggests the blue-chip index might be a better buy for international diversification.
Clearly, as uncertainty prevails, investors who buy stocks and funds today shouldn’t expect high returns in the short run. But after the challenges of the stock market crash gradually subside, they’re likely to give way to a market recovery. As investor confidence returns, the market could go on to create new highs as it had done after every crash in the past.
As such, now could be the right time to buy a selection of stocks or funds while they offer wide margins of safety.
