A second market crash may or may not occur following the recent rebound in equity prices. As such, investors may wish to purchase cheap shares today while they offer good value for money in many cases, ahead of a likely long-term stock market recovery.
Of course, keeping some cash on hand in case more attractive buying opportunities come along could be a sound move. However, with many sectors appearing to offer wide margins of safety, investors may wish to invest a large proportion of their portfolio while their prices are temporarily low.
Predicting another market crash
Trying to predict when a market crash will occur is almost impossible. For example, at the present time, the stock market faces numerous risks that could realistically weigh on the world economy’s prospects. However, at the same time, it could be argued many of those risks are already factored into share prices. Therefore, they may not necessarily cause a severe decline in stock prices should they come to fruition.
Investors may wish to take advantage of low prices while they’re on offer. The past performance of the stock market suggests its downturns don’t last in perpetuity, and can quickly give way to sustained bull markets that offer high returns. This may mean that focusing your capital on stocks, rather than other assets, could be a shrewd move. It may not necessarily lead to high returns in the short run, due to the threat of another market crash, but could produce relatively high capital growth in the coming years.
While some sectors have rebounded following the recent market crash, other industries continue to be exceptionally unpopular among investors. For example, energy, leisure, and retail stocks are trading significantly below their long-term averages in many cases. This suggests they may offer wide margins of safety, and that investors are adopting a cautious stance regarding their prospects.
This could present a buying opportunity for long-term investors. Although there are clear risks ahead that could cause their stock prices to trade lower for a time, over the coming years a recovery from their current price levels seems likely.
As mentioned, holding some cash in case of a market crash could be a sound move. However, holding too much of your capital in assets that offer low returns, such as bonds and cash, could be detrimental to your long-term financial prospects. Low interest rates and the potential for reduced spending power may mean that shares offer significantly greater return prospects. Especially since they’ve wide margins of safety in many cases.
Therefore, despite the threat of another market decline, now could be the right time to buy a diverse range of cheap shares. It could maximise your potential to take part in a likely stock market recovery.
The post Why I’d buy cheap shares despite the threat of another stock market crash appeared first on The Motley Fool UK.
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