The prospect of a second stock market crash may cause some investors to become fearful about their ISA’s performance. After all, a declining FTSE 100 or FTSE 250 would be likely to produce a severe drop in an ISA’s valuation.
However, a market fall may mean that there are buying opportunities across a wide range of UK shares. For long-term investors who are invested in high-quality companies that are likely to survive a challenging period, there may be opportunities to build a £1m+ ISA over the long run.
A second market crash
A second market crash could easily take place before the end of the year. Of course, that statement could be applied to any point in time, since the stock market’s future prospects are exceptionally difficult to accurately predict.
However, risks such as a continued rise in coronavirus cases and the prospect of further lockdowns may make a drop in the FTSE 100 and FTSE 250’s price levels more likely. Added to that risk is the upcoming US election and Brexit. They may cause investor sentiment to weaken to some degree, which could prompt a fall in stock prices.
A long-term focus
Of course, investors who have a long time horizon can use a second market crash to their advantage. Certainly, they may experience paper losses in the coming months. However, if they do not require access to their capital for many years then they are likely to have sufficient time to enjoy a FTSE 100 and FTSE 250 recovery. Since both indexes, and the wider stock market, have always recovered from their bear markets, this outcome appears to be very likely.
Through buying stocks while they trade on low valuations, it is possible to boost your returns as share prices recover. Therefore, even if investor sentiment is weak and further falls in the prices of UK shares seem likely, it could be worth adding cheap, high-quality companies to your ISA.
Focusing on high-quality businesses
If there is a second stock market crash, it is likely that a weak economic recovery is on the horizon. Unemployment has already spiked, while there are doubts about whether consumer spending levels will quickly return to normality as lockdown measures are eased.
Therefore, it could be prudent to buy FTSE 100 and FTSE 250 shares that have solid financial positions and competitive advantages. They may be more likely to survive a difficult set of operating conditions in the short run so that they can benefit from a likely recovery over the long run.
Buying such companies can lead to high returns, with a market crash providing the opportunity to purchase them when they are lowly-priced versus recent valuations. This could benefit long-term investors and increase your chances of building a £1m ISA.
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.