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.
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.
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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.