Buying crashing shares to retire early may seem like a risky strategy to many investors. They may view an uncertain economic outlook as a reason to avoid stocks and instead purchase other assets such as gold following its recent price rise.
However, the long-term prospects for the stock market seem to be relatively bright. Buying a range of high-quality businesses at cheap prices could lead to impressive returns that have a positive impact on your retirement plans.
A rising gold price
Of course, a rising gold price may seem more attractive than crashing shares at first glance. The precious metal has soared to a new record high this year as a combination of low interest rates and an uncertain economic outlook have increased demand for gold.
While this trend may continue in the short run, further growth may be more limited than many investors realise. Buying any asset when it is trading close to a record high can mean there is less capital growth potential versus buying a cheaper asset. And, while economic uncertainty may continue over the coming months, the track record of the global economy shows that a return to strong growth is likely. This may cause investor sentiment towards defensive assets such as gold to weaken, while riskier assets such as shares may become more popular as investors become less risk averse.
Buying opportunities among crashing stocks
Previous global economic downturns and bear markets suggest that buying crashing shares is a sound investment strategy. Ultimately, no bear market has ever persisted indefinitely. Therefore, investor sentiment and the operating conditions for undervalued companies are likely to improve over the coming years.
Furthermore, weak investor sentiment towards the stock market means that some high-quality businesses may be grossly undervalued. Even though they have difficult near-term futures, their solid financial positions and wide economic moats mean that they are very likely to recover in the long run. As such, buying them today when they are undervalued may provide significant capital growth potential for new investors that boosts their portfolio returns.
A long-term outlook
Of course, crashing shares could keep falling over the short run. There is a very real threat of a second market crash as a result of risks such as the US election and coronavirus. They may hold back global economic growth in the coming months and weigh on investor sentiment.
However, investors who have a long time period until they will retire are likely to have sufficient time available for the stock market to mount a successful recovery.
Therefore, while paper losses cannot be ruled out in the short run, buying crashing shares today while they are cheap could be a very profitable strategy that outperforms other assets such as gold. Over time, it may boost your portfolio returns and improve your chances of enjoying an early retirement.
Where to invest $1,000 right now
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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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