The recent stock market crash may have caused your portfolio’s valuation to decline. However, the track record of the stock market shows that it is 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 at low prices
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 is worth is likely to remain a popular strategy over the coming years.
Of course, buying stocks during or following a market crash means there is 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 that 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 is an 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 will have a decade or more left until they are likely to retire. This could prove them with 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.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.