The FTSE 100’s recent market crash is likely to cause many investors to seek relative safety in less risky assets. However, this may lead to them missing out on the index’s potential recovery.
Likewise, adopting a short-term focus may be detrimental to your portfolio’s returns. Speculative companies could seem appealing, but it may be a better idea to focus on financially sound businesses.
Avoid mistakes such as short-termism, flocking to less risky assets and buying speculative stocks. If you do, you could improve your financial prospects to boost your chances of retiring early.
A common mistake made by a large number of investors during a bear market is focusing on the short-term prospects for the FTSE 100. The index is likely to experience a huge amount of volatility over the coming months, as the economic impact of coronavirus gradually becomes clear. There are likely to be periods when investors are bullish about the world economy’s recovery prospects. But on some days, they could become very bearish.
As such, adopting a long-term focus for your portfolio could be a shrewd move. It may enable you to cut through the market noise, and not become too concerned about paper losses over the coming months. Certainly, focusing on the long term may be difficult at times. But the track record of the stock market shows that investors who can look five or 10 years ahead during a bear market can capitalise on undervalued stocks to generate high returns.
Less risky assets
The relative safety of assets such as cash and bonds may be highly appealing to many investors at the present time. After all, they are far less likely to experience losses when holding cash savings or buying investment-grade bonds.
However, the returns on cash and bonds are extremely unappealing at the present time. Low interest rates look set to continue over the coming years, as the Bank of England aims to support the economic recovery through a loose monetary policy. Therefore, there is a real risk that your returns on cash and bonds will lag inflation. This could cause your spending power to decline.
A better idea could be to buy stocks now while they trade on low valuations. Doing so may boost your long-term financial prospects, and increase your chances of retiring early.
Of course, it makes sense to buy companies with strong balance sheets and solid cash flow given the uncertain economic outlook facing the UK. While it may be tempting to buy cyclical companies that are dirt cheap at the present time, ensuring that your holdings survive the next 6-12 months could be the most important aspect to consider.
Through buying high-quality businesses at fair prices, you can increase your risk/reward ratio. In the long run this may enable you to retire early, and enjoy a growing passive income in older age.
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.