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How I’d invest in this stock market crash to get rich and retire early

The recent stock market crash could present buying opportunities for long-term investors. Certainly, there is scope for stock prices to move lower in the near term depending on news regarding coronavirus. However, in the long run a recovery in stock prices seems likely based on its past performance.

Therefore, buying financially-sound businesses while they trade at low prices could be a shrewd move. Through purchasing a wide range of stocks, you could capitalise on the recent market downturn to generate high returns in the coming years so that retiring early becomes a more realistic goal.

Financial strength

There is little to be gained in buying stocks that are unlikely to survive what now seems likely to be a period of economic difficulty in 2020. Some businesses that had been viable during a period of economic growth since the financial crisis may now struggle to service their debt and pay fixed costs at a time when their sales prospects are weak.

Therefore, buying financially-sound businesses could be a sound move at the present time. Companies with strong cash flow, modest debt levels and a relatively high proportion of variable costs that can easily be cut may be in a better position to remain in business relative to their peers. Through buying such companies, you may stand a better chance of capitalising on the recovery prospects of the world economy in the long run.

Margin of safety

It may not feel instinctive to buy stocks when they face a hugely uncertain future. However, the track record of the stock market shows that it is a cyclical index that has always experienced bear markets and bull markets. As such, the current downturn is unlikely to last in perpetuity, and is very likely to be replaced by a bull market as the economy’s growth rate increases and investor sentiment improves.

Therefore, buying stocks while they offer wide margins of safety could be a profitable move that improves your chances of retiring early. As with any asset, buying it at a low price provides greater scope for capital growth. Therefore, identifying good value stocks and buying them today for the long term may catalyse your portfolio returns.

Diversification

Diversification is sometimes overlooked by investors, yet it can significantly reduce the risks within your portfolio. Owning a variety of companies that operate in different areas and industries means you are less reliant on one stock for your returns. As such, your company-specific risk is lowered, which can provide a more attractive risk/reward ratio.

Since the cost of diversifying your portfolio is lower than ever as a result of cheap online sharedealing opportunities, now could be a worthwhile time to buy a range of stocks for the long run. They could outperform other mainstream assets and enhance your retirement prospects.

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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.