Since the major sell-off in equities in March, global stocks have risen sharply. To illustrate, the FTSE 100 index has climbed by 23%, while its US counterpart, the S&P 500, has surged by almost 40%. Fears over the possibility of a second market crash are understandable given the wider macroeconomic uncertainty. However, investors with a long-term mindset needn’t be worried. In fact, a second major sell-off could actually boost your chances of building serious wealth. Here’s how.
Cheap share prices
As we saw in March, the stock market crash resulted in cheap share prices across the board. Countless quality FTSE 100 companies were trading far below their average historic valuations, and a handful still are today. The extent of the sell-off meant that certain stocks appeared oversold in the eyes of many. Thus, there was an ideal opportunity for investors to pick up undervalued shares and hold them for the long term.
In the event of a second stock market crash, those same investors will be primed and ready to repeat the process over again, and so should you. Rather than seeing a market crash as a disastrous event, look on the bright side and use it as a perhaps once-in-a-lifetime opportunity to buy bargain stocks.
I think it’s also worth pointing out that fears over another market crash shouldn’t deter you from investing now. After all, what if that second sell-off you’re banking on never comes? That said, if you wish to lower your risk profile, I’d suggest drip feeding your investments into the market.
Holding for the long term
The short-term volatility in the stock market is such that holding investments for any period less than 5 years is a big risk. But for those with a long-term horizon of a decade or more, investing in shares is one of the best ways to build capital.
For example, assuming an annual return of 8% (equal to the annualised returns of the FTSE 100 over the past 30 years), a £5,000 investment today would be worth £50,314 after 30 years!
Therefore, if a second stock market crash happens, I’d use it as an opportunity to load up on cheap shares and hold them for the long term. That way, the wonders of time and compounding returns will help turn a relatively small investment into a tidy amount.
Don’t fear the second stock market crash
As the number of confirmed Covid-19 cases continues to rise around the world, the potential for a second stock market crash in the near future remains a possibility. If a second wave of infections takes hold, I expect investor sentiment to rapidly deteriorate, resulting in plunging share prices once again.
Combine this with rising tensions between the US and China and the short-term macroeconomic outlook appears rather bleak. Nevertheless, it’s by no means certain that a second major sell-off is around the corner. After all, the stock market is always forward-looking and is certainly not the economy.
As such, I wouldn’t fear a second stock market crash. Rather, I’d use it as an opportunity to pick up even more cheap shares and hold them for the long term.
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Matthew Dumigan 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.