The recent market crash brought to an end a global bull market that had lasted in excess of ten years. While it is likely to have caused significant paper losses for many investors, it presents a buying opportunity for those individuals who have a long time horizon.
Through purchasing a diverse range of businesses with solid fundamentals, you can capitalise on the stock market's future growth potential. It recovered from its previous crash in 2008/09 to produce new record highs, and is likely to do likewise over the coming years.
Recovering from a market crash
The recent market crash caught almost all investors by surprise. However, it is not without precedent, since the global stock market has experienced several sudden downturns in its history.
A common theme among them is that the stock market has always produced a rally that leads to new record highs. Certainly, that may seem unlikely in the recent aftermath of the 2020 market crash. However, the same could have been said during the global financial crisis and during any other previous downturn.
Investors who have the self-discipline to buy undervalued stocks after a market crash can generate high returns in the long run. In fact, market downturns often offer the best value opportunities due to weak investor sentiment.
A diverse range of sectors
After the recent market crash, it is unclear which sectors will produce strong growth in the coming years. Sectors such as retail, travel and leisure, mining, energy and many others face trading conditions that are exceptionally difficult to accurately predict at the present time. They may experience a fast return to pre-coronavirus operating conditions, but may equally have limited opportunities for growth.
Therefore, investing across a broad range of sectors could be an effective means of benefitting from the stock market's recovery while limiting overall risk. Due to weak investor sentiment, many industries that offer long-term growth potential contain companies with wide margins of safety. Through holding a variety of them, you can reduce your reliance on a small number of businesses for your returns in what may prove to be an unpredictable investing environment.
Solid finances
Buying companies with solid finances after a market crash may also prove to be a sound move. They may be better able to cope with a period of economic weakness than their peers, and could even expand their market position at the expense of rivals that have less robust finances.
Through identifying businesses with large cash balances, access to banking facilities and debt levels that are serviceable even with reduced revenue in the short run, you can build a stronger portfolio that has less overall risk. It may also produce higher returns as you invest in companies that could have a higher chance of prospering in what may prove to be a period of weaker global economic growth.
