The FTSE 100’s recent market crash may cause some investors to consider giving up on the stock market. After all, the FTSE 100 has dropped by 35% in a matter of weeks. So some investors may feel taking alternative risks, such as buying a lottery ticket or purchasing Bitcoin, could be worthwhile.
However, the FTSE 100’s recent decline is unlikely to be permanent. Its track record shows it’s always been able to recover from its bear markets to produce new record highs. As such, keeping faith with stocks and buying more of them at their current low prices could prove to be the most effective response to the stock market crash.
Although the FTSE 100 has dropped heavily in recent weeks, investors are currently experiencing paper losses on their holdings. In other words, the losses aren’t realised until they’re actually sold. As such, there’s scope for FTSE 100 stocks to make recoveries in the coming weeks and months. This may enable you to recover your losses experienced over recent weeks.
By contrast, the lottery simply offers a win or lose scenario. Likewise, Bitcoin doesn’t have a long track record of recovery as per the FTSE 100. It faces numerous threats that could derail its progress in the long term. For example, its limited size, regulatory risks, and competition from other virtual currencies may lead to a disappointing performance relative to the FTSE 100.
Due to its recovery potential, the FTSE 100 could offer a wide range of buying opportunities at the present time. Investor sentiment towards a number of different sectors is exceptionally weak due to the uncertain outlook for the economy.
For example, industries such as airlines, housebuilders and banks may face high risks in the short run. However, companies that have strong balance sheets, resilient cash flows and solid market positions could emerge from the current economic crisis in an improved position relative to their peers. This may enable them to deliver high returns in the long run.
Therefore, purchasing a wide range of stocks that operate in different sectors and geographies may enable you to benefit from the FTSE 100’s likely recovery. This could lead to the index offering a highly favourable risk/reward ratio on a relative basis.
As mentioned, paper losses only become realised losses when they’re sold. Unfortunately for investors, the time it may take for the FTSE 100 to make a successful comeback is a known unknown. Previous bear markets have often taken months, or in some cases years, to be fully reversed.
As such, adopting a long-term time horizon could be crucial at present. More pain may be ahead for FTSE 100 investors, and further paper losses could be experienced. But continuing to buy high-quality shares at discounted prices could be the best means of deploying your capital at the present time.
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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.