The prospect of a second stock market crash may cause some investors to buy gold. This could prove to be a sound move in the short run, since risks such as Brexit and coronavirus may catalyse the precious metal’s price over the coming months.
However, over the long run, the capital appreciation of gold may be more limited than that offered by the stock market. As such, now could be the right time to start planning for the next market downturn. Doing so may mean you’re in a good position to capitalise on low valuations and long-term recovery potential.
The next stock market crash
Planning for the next stock market crash may be a good idea because the current bull market is unlikely to last in perpetuity. Previous stock market gains have always been interrupted by corrections and downturns. While this has meant paper losses in the short run, buying opportunities are generally greater when investor sentiment is weak. Therefore, ensuring that you are able to capitalise on low prices caused by a bear market could prove to be a sound move.
Of course, a second downturn this year is a distinct possibility. Risks such as Brexit, the US election and coronavirus look set to cause weaker investor sentiment in the coming months. Even if they don’t prompt a market decline, history suggests that falling share prices are an occurrence that comes along fairly regularly. Therefore, planning for a downturn now may be a sound move.
Avoiding gold and planning for cheaper share prices
Clearly, the prospect of a stock market crash is likely to cause risk aversion among investors. Demand for gold is likely to rise, since it has a long history as a store of wealth. However, it may be more logical to instead prepare for the next market downturn so you can respond quickly to falling stock prices. As this year’s fall showed, the stock market can quickly recover from low price levels. This means that investors may not have a large amount of time to take advantage of buying opportunities.
As such, ensuring that you have some cash available to take advantage of lower share prices in a stock market crash could be a good idea. Similarly, identifying attractive businesses that may not be priced at appealing levels at the present time could be a shrewd move. This may mean you can act quickly on low prices that may only be temporarily available. Meanwhile, ensuring that your current holdings have sufficient financial strength to survive a weaker economic period may also lead to higher long-term returns.
This plan may not allow you to generate high returns in the short run. Gold’s price may rise even further in the coming months. However, history suggests that buying cheap UK shares after a stock market crash has been a sound means of obtaining high returns. Preparing for this scenario may lead to a larger portfolio value in the long run.
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