The recent stock market crash has caused significant losses for many investors. A wide range of stocks have not yet recovered from one of the most severe and fast-paced stock market declines in living memory.
While further challenges could be ahead for investors, the recent market crash could present a superb buying opportunity. Although short-term risks remain, the recovery potential of the stock market suggests that purchasing a diverse selection of companies today could lead to strong capital returns in the long run.
A rare occurrence
As mentioned, the recent market crash has been one of the fastest and most significant declines in recent decades. Although there have been other bear markets such as the global financial crisis, they have generally occurred relatively infrequently. In fact, bear markets are rare occurrences and often do not last for a prolonged period of time before a recovery comes into force.
Therefore, during an investor’s lifetime there are unlikely to be a large number of opportunities to buy stocks when they trade at bargain levels. Certainly, there are always opportunities to buy attractive stocks in all market conditions. But the valuations that are currently on offer across many industries have not been seen since the financial crisis over a decade ago – if at all — and are unlikely to be present for many more years in future.
Buying in a market crash
Although the prospect of buying undervalued stocks during a market crash may not feel natural to many investors, it can be a highly profitable exercise. After all, the stock market has always recovered from its declines. This time around is unlikely to be any different over the long run.
As such, it could be a good idea to adopt a long-term view of your holdings and to try to ignore market noise. Many investors have negative views of the stock market, while others are seeking to second-guess the movement of stock prices in the short run. By ignoring their views and instead buying high-quality businesses at low prices for the long run, you could capitalise on bargain valuations at present.
This strategy may require a large amount of self-discipline, as well as an acceptance that paper losses could be ahead in the short run. But it has been a successful strategy for many investors in periods when a market crash has previously occurred.
As well as buying stocks in a market crash, it is important to manage risk through diversification. It is currently extremely difficult to know which sectors will return to strong growth in the coming years, since the full impact of coronavirus on consumer behaviour is a known unknown.
Therefore, reducing your exposure to specific companies and sectors could cut your portfolio risk. It may also enable you to generate higher returns in the coming years as the stock market gradually recovers.
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.