This year’s stock market crash sent the FTSE 100 spiralling downwards at an extremely fast pace. However, since then, the index has rebounded, so that it now trades around 1,000 points higher than it did at its lowest point in March.
Looking ahead, there’s a very real threat of a second market decline taking place in the coming months. Many risks face investors that could lead to lower sentiment.
However, if another downturn does occur, it could prove to be a buying opportunity due to the index’s long-term recovery potential.
The prospect of a second stock market crash
The FTSE 100 could realistically experience a second stock market crash over the near term. There are clear risks ahead that could cause investor sentiment to decline and operating conditions for many companies to deteriorate.
For example, coronavirus cases could increase in the UK and the rest of the world. This may cause additional lockdown measures to be imposed that disrupt the financial prospects for many businesses. Meanwhile, political risks in Europe and in the US are elevated at the present time. This may mean that investors adopt a more cautious attitude in future to protect themselves against possible share price declines.
A FTSE 100 buying opportunity
Clearly, a stock market crash would be likely to cause many FTSE 100 investors to become concerned about their financial positions. However, the track record of the index suggests that a recovery is very likely following a bear market. In fact, the index has been able to surge to new record highs in the months and years following every one of its previous downturns.
In fact, stock market declines have taken place since the index’s inception in 1984. The first major bear market occurred in 1987, when share prices collapsed at one of the fastest rates ever recorded. Since then, the index has experienced other declines. These include the dot com bubble and the global financial crisis. Yet, it’s been able to produce a high single-digit annual return. And that’s meant many investors have generated large portfolios simply from buying a diverse range of UK shares and holding them for the long run.
Taking advantage of cheap UK shares
Buying FTSE 100 shares during a stock market crash isn’t an easy task. It’s natural for any investor to have doubts about whether it will lead to losses. And, unfortunately, it can produce paper losses in the short run in many cases because it’s extremely difficult to call the bottom of a market downturn.
However, by investing in a diverse range of financially-sound businesses, you can reduce risks and benefit from a stock market recovery. Bear markets don’t happen all that frequently, and the next one could be a rare buying opportunity for long-term investors.
