Investing after the FTSE 100 has experienced one of its fastest and most severe market crashes of all time can be a challenging task. However, focusing your capital on companies with solid balance sheets may increase your chances of overcoming near-term risks to benefit from a potential long-term recovery.
Furthermore, buying a diverse range of stocks with defensive characteristics, or operate in sectors that could recover more quickly than others, could lead to a stronger performance from your portfolio in the long term.
Balance sheet strength
Companies with strong balance sheets could have a significant advantage over their peers in the current economic environment. Put simply, they may be better able to survive a period of lower sales if they have modest debt and a large amount of cash.
At the present time, it’s unclear how the economy will perform over the coming months. There could be a fast recovery, or a prolonged recession. Therefore, purchasing stocks that are very likely to survive a worst-case scenario could be a logical move. They may even be able to gain market share at the expense of weaker rivals. They’re those who struggle to service their debt or cover their costs due to weaker balance sheets.
Companies that have defensive characteristics have been relatively unpopular among investors in recent years. Investors have preferred to buy cyclical companies that have a higher dependence on the performance of the economy. This has been understandable, since the world economy has experienced a decade-long period of growth.
Looking ahead, the prospects for the world economy are now more uncertain than they have been since the last recession in 2008/2009. As such, buying stocks that have less dependence on the wider economy’s performance could prove to be a shrewd move. They may face lower share price declines in the short run. There’s also a better chance they’ll deliver profit growth and rising dividends over the coming years.
Another simple step to help you maximise your returns following the FTSE 100’s market crash is to diversify across a wide range of stocks. At the present time it’s unclear which sectors and countries will be worst hit by coronavirus. As such, buying a limited number of stocks that trade in a small range of industries and locations may well be a risky move.
A more logical step is to buy companies that operate across different regions, as well as across a range of sectors. This will reduce your reliance on a specific geographical area or sector. It will also lower your overall risks.
This could lead to higher returns in the long run. It may aslo increase your capacity to use lower FTSE 100 share prices following the market crash to your advantage.
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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.