The recent stock market crash could present buying opportunities for long-term investors. Certainly, there is scope for stock prices to move lower in the near term depending on news regarding coronavirus. However in the long run, a recovery in stock prices seems likely based on its past performance.
Therefore, buying financially-sound businesses while they trade at low prices could be a shrewd move. If you buy a wide range of stocks, you could capitalise on the recent market downturn. And that means you could generate high returns in the coming years so retiring early becomes a more realistic goal.
There is little to be gained in buying stocks that are unlikely to survive what seems likely to be a period of economic difficulty in 2020. Some businesses had been perfectly viable during a period of economic growth since the financial crisis. But they may now struggle to service their debt and pay fixed costs at a time when their sales prospects are weak.
Therefore, buying financially-sound businesses could be a sound move at the present time. Look at companies with strong cash flow, modest debt levels and a relatively high proportion of variable costs that can easily be cut. Why? Well, they may be in a better position to remain in business during a market crash relative to their peers. Through buying such companies, you may stand a better chance of capitalising on the recovery prospects of the world economy in the long run.
Margin of safety
It may not feel instinctive to buy stocks when they face a hugely uncertain future, of course. However, the track record of the stock market shows that it is a cyclical index. It has always experienced bear markets and bull markets. As such, the current market crash is unlikely to last in perpetuity, and is very likely to be replaced by a bull market as the economy’s growth rate increases and investor sentiment improves.
Therefore, buying stocks while they offer wide margins of safety could be a profitable move that improves your chances of retiring early. As with any asset, buying it at a low price provides greater scope for capital growth. Therefore, identifying good value stocks and buying them today for the long term may catalyse your portfolio returns.
Diversification in a market crash
Diversification is sometimes overlooked by investors, yet it can significantly reduce the risks within your portfolio. Owning a variety of companies that operate in different areas and industries means you are less reliant on one stock for your returns. As such, your company-specific risk is lowered, which can provide a more attractive risk/reward ratio following the recent market crash.
The good news is that the cost of diversifying your portfolio is lower than ever as a result of cheap online share-dealing opportunities. So now could be a worthwhile time to buy a range of stocks for the long run. They could outperform other mainstream assets and enhance your retirement prospects.
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.