The recent share market crash has caused significant losses for many investors. A wide range of shares have not yet recovered from one of the most severe and fast-paced market declines in living memory. Many would be forgiven for thinking now is not a time to look at buying bargain shares.
While further challenges could be ahead for investors, the recent market crash could present a superb opportunity for investors. Although short-term risks remain, the recovery potential of the share market suggests that purchasing a selection of diverse companies today could lead to strong capital returns in the long run.
Image source: Getty Images
A rare occurrence
As mentioned, the recent market crash has been one of the fastest and most significant declines in recent decades. Although there have been other bear markets such as the global financial crisis (GFC), they have occurred relatively infrequently. In fact, bear markets are rare occurrences which usually don't last for a long time before a recovery comes into force.
Therefore there is unlikely to be a substantial number of opportunities for an investor to buy into companies when trading at a bargain share price. Certainly, there are always opportunities to buy attractive shares in all market conditions. But the valuations that are currently on offer across many industries have not been seen since the GFC over a decade ago – if at all. And they are unlikely to present themselves again for many more years.
Buying in a market crash
Although the prospect of buying undervalued shares after a market crash may not feel natural to many investors, it can be a highly profitable exercise. After all, the share market has always recovered from its declines. And this time around is unlikely to be any different in the long run.
As such, it could be a good idea to adopt a long-term view of your holdings and to ignore market noise. Many investors have negative views on the share market. Others are seeking to second-guess the movement of share prices in the short run. Instead, by buying high-quality businesses at low prices you could capitalise on the bargain valuations that are currently present for some shares.
This strategy may require a large amount of self-discipline, as well as an acceptance that paper losses could be ahead in the short run. But it has been a successful strategy for many investors in periods where a market crash has occurred.
Diversification
As well as buying shares after a market crash, it is important to manage risk through diversifying your portfolio. It is very difficult to know which sectors will return to strong growth in the coming years. This is as the full impact of the coronavirus on consumer behaviour remains a known unknown.
Therefore, diversifying your exposure across companies and sectors could minimise your level of portfolio risk. It may also enable you to generate higher returns in the coming years as the share market gradually recovers.
