Investing after the worst stock market crash since the global financial crisis over 10 years ago may seem like a risky move. After all, stock prices could move lower depending on news regarding coronavirus.
However, for long-term investors there seems to be a buying opportunity. Through focusing your capital on strong businesses that are trading at low prices, you could generate impressive returns over the coming years that improve your financial prospects.
Long-term focus after a market crash
It may be tempting to sell equities and invest in lower-risk assets such as cash and bonds at the present time. They offer a much lower risk of loss, which may be appealing to investors who are understandably concerned about their financial prospects.
However, past market crashes such as the global financial crisis produced similar challenges for investors. Although it was a completely different set of circumstances that caused stock prices to fall, many companies’ valuations declined to exceptionally low levels in the global financial crisis.
In the long run, though, the stock market delivered a strong recovery. In many cases, stocks that had halved during the financial crisis went on to more than double in the following years to produce high returns for their investors. Therefore, adopting a similar long-term focus, rather than concentrating on the short run, could yield similar high returns for investors over the coming years.
Some businesses with weak balance sheets, in terms of having high debt levels and modest cash reserves, have been profitable over recent years. However, now that the world’s economic outlook is much more challenging than it has been for some time, such companies may struggle to survive.
Therefore, investing in strong businesses that are financially sound could be a worthwhile move at the present time. They may be better placed to withstand significant pressure on their financial outlooks, and could deliver a more robust recovery over the long term. They may be less risky, and could also offer higher return potential for their investors after a market crash.
While many companies are trading at low prices, their financial prospects may have significantly changed following the coronavirus pandemic. For example, their earnings may fall in the current year. This could mean that although their stock prices are cheap compared to previous levels, there is justification for them to trade lower.
As such, investors may wish to apply a wider margin of safety than they normally would before buying stocks. The intrinsic values of even high-quality companies are likely to have deteriorated in recent weeks as a result of the challenging outlook for the wider economy. By obtaining a wide margin of safety, you may be able to position your portfolio more effectively to benefit from the prospective recovery in the stock market that seems likely to take place over the coming years.
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.