The 2020 stock market crash may have caused some investors to adopt a cautious attitude towards equities. However, buying stocks while they’re undervalued could be a means of generating high returns in the long run.
The stock market has a strong track record of recovering from its downturns, and is likely to fully recoup its losses from earlier in 2020. Therefore, now could be the right time to buy a diverse range of stocks while many of them continue to offer good value for money, even after a recent rebound. They could improve your prospects of retiring early.
Even though many share prices have experienced a recovery following the market crash, a number of stocks continue to offer wide margins of safety. Although they may reflect uncertain operating conditions, and could be deserved in some cases, many sound businesses appear to be currently undervalued.
One reason for this could be that investor sentiment towards equities is weak. Therefore, even if a company has a solid financial position and a bright long-term outlook, it may be trading at a discount to its intrinsic value, due to downbeat investor sentiment towards the wider stock market.
This could present a buying opportunity for long-term investors. Stocks could continue to be unpopular and undervalued for a period of time. But over the coming years, they’re likely to deliver strong recoveries that could boost your portfolio’s returns.
Past recoveries after a market crash
The stock market has a consistent track record of recovery after every market crash it has experienced in its history. For example, in the 21st century it has fully recovered from major bear markets such as the tech bubble and the global financial crisis. That’s despite them causing a significant decline in investor sentiment and a recovery seeming very unlikely at the time.
Therefore, a full recovery from the recent stock market decline seems to be highly likely over the long run. By positioning your portfolio in high-quality stocks now, you can maximise your capacity to benefit from a resurging stock market. That should come as investor sentiment and the performance of the economy gradually improve.
Focusing on risk
Of course, managing risk after a market crash is of great importance to every investor. Not every stock will survive what could be a challenging economic period. Therefore, it’s crucial to spread your capital across a wide range of businesses. These should trade in different regions and within multiple industries. This could reduce your exposure to any one business. It will also lower your risk of large losses should your holdings experience poor performances.
Furthermore, buying financially-sound businesses with solid track records of delivering impressive performances during a variety of operating conditions could be a sound move. They may increase your chances of benefiting from rising valuations during a stock market recovery. They could also boost your chances of retiring early.
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.