Buying stocks after a market crash may sound like a risky strategy for anyone who is seeking to build a portfolio valued at over a million. It could produce paper losses in the short run due to the unpredictability still present across the stock market.
However, a market crash provides investors with the opportunity to buy stocks at low prices. It may also strengthen the competitive positions of dominant businesses in a range of industries, and allow them to generate high returns in the coming years.
As such, investing in the stock market today could increase your chances of making a million in the long run.
Buying in a market crash
Many investors adopt a strategy where they aim to buy stocks when they are priced at low levels. They then seek to hold them until such a time as they trade at a much higher price.
The main problem with that strategy is that the periods when stock prices are at their lowest have historically coincided with economic downturns. At such times, risks facing investors are at their highest.
For example, the most recent notable market crash prior to that experienced in 2020 occurred in 2008/09. At that time, a great number of companies traded at prices that had not been seen for many years.
Following the market crash, a large proportion of them delivered successful stock price recoveries. However, many investors did not buy stocks when they traded at low prices due to the short-term risks they faced. This meant that they were unable to access the wide margins of safety that were on offer for a limited time, with their returns in the following years likely to have suffered as a result.
Although at the present time there are significant risks facing investors over the short run, in the long term the stock market is likely to recover. Therefore, buying a diverse range of companies during this market crash could allow investors to fulfil the first part of their ‘buy low/sell high’ strategy.
The recent market crash could also cause stronger companies within a specific industry to improve upon their competitive positions. For example, those businesses that are better equipped to survive a prolonged economic downturn may gain market share. This may allow them to generate higher returns in the coming years.
As such, investors who can not only purchase cheap stocks, but also the highest-quality companies in an industry, may improve their chances of generating high returns in the coming years.
The market crash may highlight weaknesses in companies that had previously been overlooked by investors, such as high debt levels and inefficient business models. Investors may now focus their capital on the strongest companies within a sector that offer the most appealing risk/reward ratios. This could boost their returns over the long run.
Risks may continue to be present over the coming months across the stock market. However, buying high-quality businesses with dominant market positions while they trade at low prices could be a sound strategy. It may boost your portfolio’s returns and increase your chances of making a million 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.