The chances of a second market crash could remain elevated over the coming months. Rising unemployment coupled with weak GDP growth may cause investor sentiment to decline.
While this may cause paper losses for investors, it could also present a rare buying opportunity. Sharp stock market declines are relatively uncommon. Historically, they’ve also been followed by sustained bull markets.
As such, buying cheap stocks in a bear market may improve your long-term financial prospects, and could even help you retire early.
A second stock market crash
Considerable risks remain in place that could cause a second market crash. As well as the prospect of a further rise in coronavirus cases, other threats could derail the financial performances of companies and cause investor sentiment to weaken.
For example, the US election later this year may lead to fiscal policy changes that cause investors to adopt a more cautious attitude towards equities. Similarly, Brexit could lead to reduced business confidence that acts as a short-term drag on investor sentiment.
Therefore, investors may yet experience another opportunity this year to buy stocks at extremely low prices due to a market crash.
A rare event
Even though the prospects for a second market crash may be relatively high, history shows that bear markets are uncommon. In fact, the last major decline in stock prices occurred over a decade ago. Therefore, most investors are only likely to experience a handful of bear markets during their lifetimes.
This means that taking advantage of the low prices created by a stock market decline could be very important to your retirement prospects. They may enable you to buy high-quality businesses at relatively low prices. History shows no bear market has ever lasted in perpetuity – even if at the time it felt as though a bull market was unlikely to ever return. Therefore, through buying a diverse range of stocks during rare opportunities when they’re cheap, you could improve your prospects of retiring early.
Stock prices could be volatile for some time after the recent market crash, but equity prices are likely to rally over the long run. Yet most investors have a number of years left until they plan to retire. That means they’re likely to have sufficient time for their holdings to recover – even if there’s a second downturn this year.
Therefore, if a high-quality stock is trading at a low price today, buying it for the long run could be a shrewd move. Certainly, a second market decline could make it even cheaper. But, in many cases, that outcome has been priced in by investors through lower valuations.
Therefore, building a portfolio over the coming months, and continuing to add to it even if there’s a further bear market, could be a sound overall strategy.
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.