The recent stock market crash has caused significant paper losses for many investors. In the short term, they may increase depending on news regarding coronavirus. As such, many investors may determine that now is not the right time to be buying stocks.
However, just as previous market crashes such as the global financial crisis, which occurred over a decade ago, proved to be buying opportunities, the 2020 downturn may end up being viewed the same way over the long run. As such, buying financially-sound businesses while they offer wide margins of safety could lead to high returns in the coming years.
Recovery potential after a market crash
The prospect of a stock market recovery may seem unlikely at the present time. After all, coronavirus has sadly had a huge impact on the health and wellbeing of many people across the world. It has led to lockdowns being implemented in many countries that are expected to produce a major decline in economic output.
However, the global economy has always recovered from its previous downturns. Certainly, this has taken many months or even years in some cases. But it has always returned to positive GDP growth, which has produced rising earnings for businesses and improving investor sentiment. Therefore, buying stocks now could enable you to take part in the world’s likely economic recovery over the coming years.
A stock market crash enables investors to buy companies while they trade on low prices. This has historically been a sound investment strategy, since equity prices are cyclical. They have always followed the same pattern of experiencing bull markets and bear markets, with neither lasting in perpetuity.
Buying a company at a lower price can lead to a more favourable risk/reward ratio for investors. There is greater scope for capital growth, while many of the risks faced by businesses may be priced in. As such, investors who are able to buy bargain stocks today could generate high returns as the recent market crash gives way to growth.
As well as the stock market’s recovery potential and low prices, now could be the best buying opportunity since the global financial crisis due to the financial strength of many businesses.
Although a wide range of sectors are likely to be negatively impacted by coronavirus in the short run, in many cases they contain companies that have solid balance sheets and wide economic moats. They may help such businesses to survive a period of economic weakness, and return to growth over the coming years.
Investing in financially-sound companies can reduce your risk and improve your prospects of experiencing long-term growth. As such, focusing on the balance sheets of the companies you intend to purchase could be a worthwhile move when aiming to capitalise on low valuations found across the stock market following its recent crash.
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.