The recent stock market crash means that many sectors contain bargain shares. Although they could experience further challenges in the short run from threats such as geopolitical uncertainty concerning the US and China, over the long run they offer recovery potential.
With the stock market having always recorded higher highs following its past bear markets, now could be the right time to buy a diverse range of companies and hold them for the long run.
Recovery potential of bargain shares
The stock market’s track record of recovery is extremely strong, and is the key reason why now could be the right time to buy bargain shares.
Certainly, it has experienced major declines such as that recorded in the recent market crash. However, it has always been able to post new record highs in the months or years following its declines.
For example, major indexes such as the FTSE 100 lost more than half their value during the global financial crisis. Yet they were able to recover to record levels in the decade-long bull market that took place as the world economy gradually recovered from the challenges it experienced in 2008/09.
Although the global economy looks set to experience a significant slowdown in its growth rate in the short run, the stock market is likely to post high returns in the coming years as investor sentiment gradually improves. Therefore, investors who are able to invest now while many bargain shares are on offer could maximise their returns as the economy, and stock market, experience improving growth rates in the coming years.
Of course, the stock market is unlikely to grow in a smooth and uneventful fashion. Past recoveries have shown that volatility can be high while risks remain on the horizon. For example, over the coming months, a second wave of coronavirus cases could hurt investor sentiment and cause stock prices to come under pressure.
As such, it is crucial that investors manage risks when buying bargain shares through strategies such as diversification and purchasing companies with sound finances.
Diversifying across a range of industries and geographies may limit your exposure to companies that experience challenging trading conditions, as some sectors and regions may be less affected by the likely economic slowdown than others. And, by purchasing companies with sound balance sheets, it may be possible to increase your exposure to those businesses that are most likely to survive difficult operating conditions.
Although it may require a significant amount of self-discipline to buy bargain shares after a market crash, doing so could boost your long-term return prospects. The stock market has an excellent track record of rebounding from its various bear markets. It is very likely to do likewise after its recent market crash, which could make today the ideal time to buy a range of solid businesses to hold for the long run.
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.