The recent share market crash could present a buying opportunity for investors who can adopt a long-term approach to their portfolios. Of course, in the short run, many share prices could experience declines, should the global economic outlook deteriorate.
However, by focusing your capital on the highest-quality shares available and diversifying across a range of sectors, you could obtain a favourable risk and reward ratio while prices are low. This could increase your chances of making a million over the coming years.
A long-term approach
Investing during, or shortly after, a market crash can lead to disappointing results in the short run. For example, the economic impact of coronavirus may prove to be worse than investors are factoring. This may cause share prices to experience further falls that produce paper losses for investors.
As such, it's important to adopt a long-term approach when investing during high share market volatility. The track record of equities shows that they experience periods of decline at fairly regular intervals. However, these periods have been followed with strong recoveries leading to record share market highs. As such, buying shares today while they offer wide safety margins could enable you to benefit from the long-term recovery potential.
A focus on quality
As with every economic downturn, some companies will not survive. For example, it may experience a decline in sales and be unable to pay fixed costs. Or, it may have taken on too much debt during the economic boom and be unable to service it.
Therefore, it is worth assessing the financial strength of a business before purchasing a slice. This may include focusing on its debt levels, cash flow strength and interest coverage ratio to realise the likelihood of it surviving a period of low sales. It may also be worth checking the company's performance in prior economic downturns to assess its defensive characteristics when sales were under pressure.
Diversifying across multiple sectors
On top of buying high-quality companies for the long term, diversifying across sectors may be a sound move during a market crash. Some sectors, such as travel and leisure, may struggle to emerge intact from the current crisis. They may face a prolonged period of weaker demand that reduces return prospects.
As such, having exposure to a range of sectors could reduce overall risk and improve return prospects. This could enable you to fully access the share market's long-term recovery potential. And it could boost your chances of generating a 7-figure portfolio in the coming years.
