The FTSE 100’s 35% decline since the start of 2020 is one of the fastest in its history. In the short run, things could get worse before they improve. But, in the long run, the stock market crash could prove to be a buying opportunity.
Previous crises have been caused by different events to the one faced by investors today. But they’ve all been represented through major falls in share prices.
Since the index has always recovered from its bear markets, now could be the right time to invest £5k, or any other amount, in a diverse range of stocks and hold them over the coming years. This may lead to high returns, albeit with volatile share prices in the near term.
As mentioned, the FTSE 100 has experienced multiple bear markets in its history. These have included the 1987 market crash, the technology bubble, and the global financial crisis. The index has also experienced major incidents, such as 9/11, that have caused a severe decline in its price level.
During those various crises, the natural instinct of most investors was to sell stocks and buy safer assets. Now, the same feeling is likely to be prevalent among investors. The FTSE 100 could, realistically, decline by another 35% if coronavirus causes prolonged disruption to a wide range of industries.
However, following all of those past crises, the FTSE 100 went on to deliver a significant recovery. On every occasion, it posted new record highs that allowed investors who purchased shares during the lowest ebbs of a bear market to record significant returns on their capital.
Although a recovery may seem extremely unlikely right now, based on the challenges faced by the UK and across the world, history suggests a bull market is highly likely to follow the current bear market.
As such, now could be the right time to buy a diverse range of stocks and hold them for the long run. This strategy could lead to paper losses in the coming weeks and months. However, a number of FTSE 100 shares now trade on exceptionally low valuations which have, in many cases, not been present since the last bear market over a decade ago.
Investors may wish to focus their capital on high-quality businesses which exhibit traits such as modest debt levels, wide economic moats, and diverse geographic spreads. Those attributes may help companies to overcome the challenges they face in the near term, and capitalise on difficult trading conditions to expand their market share.
Through buying a number of different companies in an ISA you can capitalise on the FTSE 100’s current low level. Investing may not feel like the right move at present, due to the risks facing the economy. But it could enhance your wealth over the coming years.
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.