The recent coronavirus market crash may have caused some investors to become increasingly cautious when it comes to managing their portfolios. The pace of decline across numerous stocks may mean that less risky assets appear to be more appealing at the present time.
However, through buying dominant businesses in sectors that have uncertain futures while they offer wide margins of safety, you could generate high returns in the long run. This strategy may boost your financial prospects and enable you to maximise your returns as the world economy recovers.
Investing in unpopular sectors after a market crash
Investing in industries that are unpopular among other investors may seem to be a risky move after a market crash. After all, in many cases they face challenging near-term outlooks, with reduced demand for their products and services likely to negatively impact on their financial prospects.
However, buying stocks when their outlooks are challenging can be a means of obtaining attractive valuations. This may enhance your long-term return prospects, since the global economy is very likely to recover from its current difficulties to post positive growth. This could lead to rising stock prices across those industries that are currently unloved by investors.
Furthermore, with investors having priced in the risks facing many sectors, there could be opportunities to buy high-quality businesses while they offer attractive risk/reward ratios.
Buying dominant businesses
Investing in the strongest businesses within unpopular sectors could be a sound move in a market crash. It may reduce your overall risks, since your capital will be focused on those companies that have the best balance sheets and strongest market positions relative to their peers. They may be less likely to succumb to a period of weaker sales than their industry rivals.
Dominant businesses may also be in a position to capitalise on industry weakness through acquisitions while company valuations are low. This may increase their market share and allow them to generate higher profits in the long run, which could lead to them enjoying a rising stock price that boosts your portfolio’s performance.
A margin of safety
Clearly, the future prospects for the world economy are highly uncertain at the present time. The stock market may have rebounded from its recent crash, but risks such as a second wave of coronavirus could persist over the coming months. This may cause investor sentiment to become highly volatile, which could lead to disappointing stock price returns over the near term.
As such, obtaining a wide margin of safety when buying stocks could be a logical move for all investors. It may help to limit your risks, and provide greater scope for capital growth in the long run.
Despite the recent market rebound, a number of companies continue to trade on valuations that are significantly below their historic averages. Therefore, there are numerous opportunities to buy undervalued stocks and hold them over the long run.
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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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