The 2020 FTSE 100 stock market crash was one of the fastest on record. The index declined by around 35% in a matter of weeks and, understandably, caused fear among many investors.
The index faces an uncertain near-term outlook, and could return to a decline should global economic growth disappoint. However, with many stocks trading on low valuations, now could be the right time to buy high-quality businesses and hold them for the long run.
Doing so could improve your portfolio’s performance and help bring retirement a step closer.
FTSE 100 firms’ financial positions
The FTSE 100’s track record shows it’s always been able to deliver a successful recovery from its variety of bear markets. It declined by more than 50% during the financial crisis. But it still went on to produce record highs. As such, investors who are able to buy and hold shares are generally rewarded over the long run.
However, the difficulty facing many investors during bear markets and economic recessions is that their own financial situation is often unclear. For example, their employment situation may be less certain than during periods of stronger economic growth.
Therefore, ensuring you have sufficient cash in place for emergencies could be a sound move before purchasing FTSE 100 shares. It may mean any amounts you invest in the stock market can remain invested for the long term. That way, it’ll benefit from a likely recovery rather than being required for day-to-day expenses should the economic outlook worsen.
As well as focusing on your own financial position, it could be a shrewd move to invest in FTSE 100 businesses that have solid finances. They may be more likely to survive what could be a major global recession and subsequently benefit from a long-term recovery.
For example, businesses that have wide economic moats may be better able to withstand a period of weak sales growth. Likewise, companies with modest debt levels and strong free cash flow may be under less pressure relative to their peers to deliver high revenue during what may be a period of slower growth.
Financially-sound businesses may even be able to capitalise on low asset prices to make acquisitions and build a more dominant presence in existing, or even new, industries. This may allow them to command higher valuations in the coming years.
The short-term movements of the FTSE 100 are likely to be hard to predict during this unprecedented situation. Therefore, it could be a good idea to invest on a regular basis in case the index comes under further pressure over the remainder of 2020.
Through buying high-quality businesses on a regular basis during periods of high volatility, it may be possible to position your portfolio for long-term growth. This could help you to build a nest egg that brings your retirement a step closer.
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.