A second stock market crash could realistically occur over the coming months. The situation regarding coronavirus is impossible to accurately predict. A second wave may mean further lockdown measures are required across a number of different regions.
Of course, a decline in stock prices may be painful for investors who experience paper losses in the short run. However, in the long run, it could provide buying opportunities that increase your chances of building a nest egg to enjoy a comfortable retirement.
Preparing for a second stock market crash
While a second stock market crash is by no means guaranteed in the short run, it may nevertheless be prudent for investors to prepare for it. As such, holding part of your portfolio in cash could prove to be a sound move. It could provide you with the means to buy undervalued stocks for the long term. It may also offer peace of mind when the rest of your portfolio is experiencing paper losses.
Clearly, cash is unlikely to be a very profitable investment in the long run. Its historic returns have been low, and higher inflation may mean that your spending power deteriorates. But during a period of significant economic weakness, having some cash to spare could be a good idea for any investor who wishes to take advantage of low stock prices caused by a market crash.
Capitalising on a stock market fall
The recent market crash brought the financial strength of companies more sharply into focus. Previously, highly-indebted companies and businesses that lacked a competitive advantage were able to survive due to a period of strong economic growth. However, the economy’s growth trajectory has changed. Investing in high-quality companies may become increasingly important from a risk/reward standpoint.
Therefore, should there be a second decline in stock prices, it could be a good idea to focus your capital on those companies that have solid finances. Low debt levels, limited fixed costs, and wide economic moats could be highly useful assets for any company to have in the coming years. Especially as economic risks could remain elevated for some time.
Value investing opportunities
Whether or not there’s a second market crash, it could be logical for investors to focus their capital on stocks that offer the best value for money. This doesn’t necessarily mean the cheapest stocks, but the ones that offer a fair price given their growth potential and overall appeal.
While this may mean you don’t end up buying the stocks trading at bargain prices, it may enable you to successfully overcome near-term risks to produce high returns in the long run.
Although the popularity of shares may have fallen following their recent decline, the track record of indexes such as the FTSE 100 and FTSE 250 highlights their recovery potential. Therefore, any investor seeking to retire rich may wish to use declines in the wider stock market to buy high-quality stocks for the long term.
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.