The recent stock market crash may have caused your portfolio’s valuation to decline. However, the track record of the stock market shows it’s very likely to recover in the coming years.
As such, through buying a wide range of high-quality stocks while they trade at low prices, you could capitalise on the recent decline in the wider market. This strategy may not produce strong results in the near term, but it could boost your chances of retiring with a relatively large portfolio.
Buying after a market crash
Buying stocks when they trade at low prices has proven to be a sound strategy to generate high returns in the long run. Value investors such as Warren Buffett have used this approach to great effect in the past. And the simple idea of purchasing an asset for less than it’s worth is likely to remain a popular strategy over the coming years.
Of course, buying stocks during, or following, a market crash means there’s a risk of loss in the near term. It is, after all, exceptionally difficult to find the bottom of any stock market decline. But, over the long run, current valuations across the stock market suggest a number of companies are trading at prices that represent a significant discount to their intrinsic values. This presence of a margin of safety could mean there’s a good opportunity for investors to access an attractive risk/reward ratio that ultimately yields high returns in the long run.
Holding for the long term
The prospect of making paper losses from buying stocks during a market crash may cause some investors to focus their capital on assets other than equities. However, many people who are seeking to build a retirement nest egg are likely to have a long time horizon. In many cases, they’ll have a decade or more left until they’re likely to retire. This could provide sufficient time for their stocks to recover from short-term paper losses to produce strong gains.
The past performance of the stock market shows that adopting a buy-and-hold strategy over the long run can yield high returns. The stock market has always been able to recover from its most challenging downturns and bear markets to post higher highs. Although this prospect may seem unlikely at the present time due to the uncertain outlook for the economy, stock prices are very likely to recover as fiscal and monetary stimulus catalyses global GDP growth.
Rather than being detrimental to your retirement plans, the recent market crash could provide them with a boost. Through buying a diverse range of high-quality stocks at low prices, and holding them for the long run, you can increase your financial freedom in older age.
The post Why this market crash can improve your chances of retiring wealthy! 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