Many stocks may have experienced a rebound after the 2020 market crash. However, a difficult outlook for the world economy means that a second market crash cannot be ruled out in the short run.
While that scenario may cause short-term pain for investors, it has the potential to provide buying opportunities for long-term investors.
Through purchasing high-quality businesses while they offer wide margins of safety, you could benefit from the stock market’s recovery potential and boost your chances of making a million.
A second market crash
Although the 2020 market crash may have priced in a more challenging outlook for many businesses, their prospects could realistically worsen over the coming months.
For example, there could be a second wave of coronavirus. Although lockdown measures have largely been successful, little is known about coronavirus at this stage. As such, it could return as lockdown measures are eased, which may cause investor sentiment to weaken.
Furthermore, geopolitical risks continue to be relatively high. Tensions between the United States and China may increase in the short run, while political risks in the US could increase later in the year as the election nears. In Europe, Brexit is likely to be a persistent risk over the coming months that could hurt investor sentiment and send stock prices downwards.
A second market crash may be bad news in the short run, but could prove to be a buying opportunity over the long term. It may allow investors to purchase high-quality businesses while they offer wide margins of safety.
Historically, this strategy has been a sound means of capitalising on the cyclicality of the stock market. It may not produce high returns in the short run, but investors with sufficient time to experience a market recovery could enjoy relatively high returns.
Of course, if economic conditions worsen, it could be a sound move to invest in financially-sound businesses. They may stand a better chance of surviving a period of lower growth, and could offer less risk and greater return prospects over the coming years.
Making a million
Buying shares during a market crash could allow you to benefit from the recovery potential of the stock market. It has an excellent track record of producing strong gains following every one of its past bear markets and downturns.
Although it is exceptionally difficult to buy stocks at the very bottom of a market crash, purchasing them when they appear to offer a discount to their intrinsic value could prove to be a shrewd move. It may lead to paper losses in the short run should the economic outlook worsen, but over the coming years it may improve your portfolio returns. It could even allow you to obtain a seven-figure portfolio as the stock market and the wider economy recover.
For some shares we Fools think are trading cheaply today, check out the following report.
5 stocks under $5
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*Extreme Opportunities returns as of June 5th 2020
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.
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