This year’s stock market crash caught many investors by surprise. The severity of the decline may have put investors off buying shares in the market.
However, there’s plenty of evidence that shows buying shares at low prices can produce high total returns over the long term. Indeed, Warren Buffett has made a fortune following this strategy.
Investing in the stock market crash
Buying stocks in a market crash can seem like a daunting prospect at first. No one wants to invest when there’s a high prospect of facing paper losses in the near term.
Nonetheless, the market has been through many dips and rallies in the past. On every occasion, it has gone on to stage a healthy recovery.
As such, while investors may have to deal with paper losses in the short term, in the long run, buying shares in a stock market crash may produce substantial returns. Blue-chip FTSE 100 stocks may be the best way to profit from market declines.
These companies tend to have established competitive advantages, as well as strong balance sheets and geographically diversified operations. All of these qualities should help them weather further economic uncertainty in the near term.
There’s also a chance these businesses could use their size and scale to snap up smaller, struggling competitors. This would help power their growth in the years ahead.
Slow and steady
Clearly, the UK economy is facing an uncertain future. Unemployment is rising and a second wave of coronavirus could lead to another lockdown. Many businesses might not be able to survive a second shutdown.
This suggests that many companies may face future uncertainty throughout 2020, and there could be a second stock market crash.
However, FTSE 100 stocks should be able to take advantage of this weakness to grow. Therefore, while these stocks might struggle in the next few months, investors should look to the long term.
Indeed, over the past 35 years, the FTSE 100 has returned an average of 9% per annum. That’s despite the fact that the market has fallen more than 50% on more than one occasion.
So, while the market’s performance is not guaranteed, history indicates that FTSE 100 may be able to produce high total returns for investors over the next few decades. And buying companies when they’re trading at low levels after a stock market crash is one of the best ways to make the most of the wealth-creating power of the market.
A diversified basket of blue-chip stocks may enable investors to profit from this growth while limiting risk at the same time.
The easiest way to copy the FTSE 100’s performance is to buy a tracker fund. This approach is simple, but investors may sacrifice potential returns. Buying individual stocks could produce higher returns. Companies with high profit margins and strong balance sheets could be best for this purpose.
Are you profiting from gold yet?
“The yellow metal” has hit record highs in British pounds…
…Now, CitiGroup believes “it’s only a matter of time” before gold hits US-dollar highs.
And there’s one LSE-listed company which we think is perfectly positioned to potentially profit.
We’ve called this stock “The FTSE’s Double Agent,” because it could potentially rise – even if the wider market falls.
Rupert Hargreaves owns no share 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.