The 2020 share market crash in March may have caused some investors to adopt a cautious attitude towards equities.
However, buying shares while they are undervalued could be a means of generating high returns in the long run. The share market has a strong track record of recovering from its downturns and is likely to fully recoup its losses from earlier in 2020.
Therefore, now could be the right time to buy a diverse range of shares while many of them continue to offer good value for money even after a recent rebound. They could improve your prospects of retiring early.
Undervalued shares
Even though many share prices have experienced a recovery following the March market crash, a number of shares continue to offer wide margins of safety. Although they may reflect uncertain operating conditions and could be deserved in some cases, many sound businesses appear to be undervalued at the present time.
One reason for this could be that investor sentiment towards equities is weak. Therefore, even if a company has a solid financial position and a bright long-term outlook, it may be trading at a discount to its intrinsic value due to downbeat investor sentiment towards the wider share market.
This could present a buying opportunity for long-term investors. Although shares could continue to be unpopular and undervalued for a period of time, over the coming years they are likely to deliver strong recoveries that could boost your portfolio's returns.
Past recoveries after a market crash
The share market has a consistent track record of recovery after every market crash it has experienced in its history. For example, in the 21st century, it has fully recovered from major bear markets such as the tech bubble and the global financial crisis. That's despite them causing a significant decline in investor sentiment and a recovery seeming very unlikely while they were occurring.
Therefore, a full recovery from the recent share market decline seems to be highly likely over the long run. By positioning your portfolio in high-quality share now, you can maximise your capacity to benefit from a resurging share market as investor sentiment and the performance of the economy gradually improve.
Focusing on risk
Of course, managing risk after a market crash is of great importance to every investor. Not every share will survive what could be a challenging economic period. Therefore, it is crucial to spread your capital across a wide range of businesses that trade in different regions and within multiple industries. This could reduce your exposure to any single business and lower your risk of large losses should your holdings experience poor performances.
Furthermore, buying financially-sound businesses with solid track records of delivering impressive performances during a variety of operating conditions could be a sound move. They may increase your chances of benefitting from rising valuations during a share market recovery and could boost your chances of retiring early.
