The devastating nature of a virus spreading throughout the global population has potentially catastrophic social, political, and economic impacts.
The effects of the coronavirus have rippled across the global stock market causing share prices to plummet in the wake of a market crash. What’s more, the fastest stock market correction in history may not yet have fully run its course.
Nevertheless, a market crash presents an opportunity to buy quality stocks at low prices, something which long-term investors should look to take advantage of.
With that in mind, here’s what I think any investor with a long-term strategy would do well to consider.
Market crashes are common occurrences. Statistically, a long-term investor can expect to experience somewhere between four and six market crashes over their time in the market.
Cold feet, as a result of falling share prices, often results in poor decision-making. This is because investors sell low and, more often than not, end up buying back in high when prices begin to pick up again. Instead, a much safer, simpler and successful strategy is to simply ride out the troughs and peaks over the long term.
It’s well worth noting that the stock market has always recovered over the medium term after a correction. To take just one example, from May 2015 to February 2016, the FTSE 100 index shed 19% of its value. However, the index had recovered by October 2016.
Snatch a bargain
Naturally, a market crash presents an opportunity to buy quality stocks for a cheaper price. As share prices continue to plunge lower, there are certainly some bargains to be had.
With the FTSE 100 index losing around 11% of its value over the last 10 days. I believe the index now contains some quality stocks that are trading on very cheap valuations.
Some of my top picks include the consumer staples giant Unilever, and multinational pharmaceutical company GlaxoSmithKline. Ultimately, companies like these, that posses strong balance sheets, healthy cash flows, and sustainable growth strategies, are best suited to shaking off the impact of the coronavirus and continuing to grow over the long term.
Hold for the long term
That said, buying quality stocks that are undervalued is only part of pathway to financial freedom. Investments must be held for the long term to allow for attractive returns. To clarify, that’s usually a time period of five or more years but ultimately, the longer the better.
Holding stocks over the long term allows for the miracle of compounding to take effect. As Albert Einstein once stated, compound interest is “the greatest mathematical discovery of all time”.
Compounding is like a snowball effect. As you invest and begin to receive dividends, on top of increases in share prices, your ball of capital rolls down the hill becoming bigger and bigger. Given enough time, even a small initial investment has the potential to grow exponentially and result in extremely handsome returns.
All things considered, I believe this market crash is an opportunity for investors to seek out a few bargains and hold them for the long term.
Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. 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.