Investing during a stock market crash to try and improve your retirement prospects may not sound like a sound move. After all, the FTSE 100’s price level could easily move lower in the short run, depending on news regarding coronavirus.
However, most investors who are planning for retirement have a long-term time horizon. Therefore, the short-term performance of their portfolio may not be their primary concern. Rather, they’re seeking to gradually build a nest egg from which to draw a passive income in older age.
Therefore, buying undervalued shares in high-quality businesses today could improve your prospects of generating a high return that boosts your chances of retiring early.
If you’re seeking to make a profit from the FTSE 100 over the next few months, now may or may not prove to be a buying opportunity. Investor sentiment and the prospects for the economy may change significantly during that time. That could lead to disappointing returns.
However, the track record of the stock market shows that, over the coming years, it’s likely to produce a strong recovery. Certainly, coronavirus is an unprecedented challenge facing the world economy. But the FTSE 100’s downturn isn’t the first time it’s dropped by 30%+ in a relatively short space of time. Just over a decade ago, it declined by over 50% – albeit over a matter of months rather than weeks.
Following its decline in 2008/09, and after its previous bear markets, the FTSE 100 went on to produce strong returns. For example, it posted record highs a matter of years following the financial crisis. Although such a scenario may seem unlikely at the present time, the track record of the FTSE 100 suggests it’s set to experience a bull market once the current downturn has ended. Therefore, long-term investors may wish to capitalise on its low valuations.
Clearly, it’s difficult to buy stocks while they face hugely difficult near-term prospects. A number of industries are likely to record a severe decline in their sales. Meanwhile, others may face a prolonged period of disruption that weakens the world economy’s performance in the medium term. Furthermore, weak investor sentiment may discourage you from buying shares at the present time.
However, by focusing on company fundamentals, you can build a solid portfolio of high-quality stocks. Businesses with large net cash positions, for example, may be in a strong position to survive the economic challenges that are ahead. Likewise, companies that have performed relatively well in previous crises may do the same this time around.
Through purchasing stocks while they’re undervalued and offer long-term recovery potential, you can improve the return prospects of your portfolio. This strategy has been successful in previous economic downturns for long-term investors. It could perform well in the coming years and improve your chances of retiring early.
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Peter Stephens has no position in any of the shares 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.
Motley Fool UK 2020