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Why the stock market crash could make you a better investor

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The stock market’s recent crash has undoubtedly been painful for many investors. Falling stock prices and declining portfolio valuations can be difficult to experience for any investor.

At the same time, recent challenges could make you a better investor. They may highlight the importance of diversification within a portfolio, which could reduce your risks in future.

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Furthermore, a market crash may demonstrate the value of focusing on company fundamentals before buying a stock. This could enhance your risk/reward ratio in the long run, and lead to greater profit from your portfolio.

Diversification

The recent market crash has hurt the vast majority of industries due to a population lockdown across many parts of the world economy. But some sectors are likely to be hit harder than others by an economic slowdown.

For example, industries such as airlines, retail and banking could be among the hardest hit by the effects of coronavirus. Consumer confidence could decline at a time when unemployment levels have risen. This may lead to reduced spending on non-essential items.

Likewise, some countries have experienced a larger number of coronavirus cases than others. This may mean they take longer to emerge from their recent difficulties. This could also negatively impact companies that operate in such locations. As such, having exposure to a wide range of geographies within your portfolio could help to reduce overall risk. It may also improve your returns in the long run.

Therefore, many investors may build portfolios that are more diversified as a result of the current crisis. Owning companies that operate in a variety of sectors and geographies may enable you to reduce your overall risks.

Fundamentals

The past decade has generally been a period of growth for the world economy. As such, companies with relatively weak balance sheets or high levels of debt have been able to generate high returns in some cases. The prospect of a period of weaker economic growth means that focusing on company fundamentals could become increasingly important to investors.

They may wish to consider businesses with modest debt levels, access to credit if needed, and strong free cash flow. Such businesses may not only be in a better position to withstand potential short-term challenges posed by a period of economic weakness, they may also offer greater long-term recovery potential.

By considering company fundamentals more closely than in the past, you may be able to build a stronger portfolio that can more effectively withstand future economic challenges. This may enhance your returns, as well as provide a more stable rate of growth.

Buying opportunities

Of course, a market crash shouldn’t dissuade you from buying stocks. Any loss is a ‘paper loss’ until it’s realised. Moreover, the market experiences downturns fairly regularly.

However, it has always recovered from its bear markets to post new record highs. Through buying when stock prices are relatively low, you could boost your portfolio returns and become a better investor in the long run.

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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.

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