Many investors may naturally avoid crashing shares when deciding where to invest their retirement portfolios. Their uncertain near-term outlooks and unpopularity among other investors may mean that assets such as Bitcoin and gold have more appeal following their recent price rises.
However, ignoring other investors and focusing on high-quality businesses that trade at low prices could be a sound retirement strategy. It may enable you to benefit from the stock market's likely recovery in the coming years. This may boost the size of your retirement nest egg and help you to retire early.
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Investing money in crashing shares
Risks to the economy's performance may mean that crashing shares remain a feature of the stock market over the coming months. Investor sentiment towards businesses that are struggling to deliver sales growth or rising profitability may deteriorate. Furthermore, risks such as Brexit and coronavirus may cause greater caution towards the wider stock market.
However, buying stocks that have fallen in price could be a sound long-term move. In many cases, their valuations have diverged from their intrinsic values. This means that their current prices may not reflect their earnings growth capacity as the economic outlook improves. The end result could be rising valuations over the long run as the economic outlook improves.
As such, ignoring other investors and buying companies with recovery potential while they trade at cheap prices could be a means of growing your retirement portfolio. Going against the views of your peers may not be an easy task. But it could be a profitable strategy in the long run.
Identifying the best shares to buy
Of course, not all crashing shares will recover. The current economic crisis could be prolonged, and it may put the financial positions of many businesses under pressure. As such, it is imperative to buy the best shares that you can find. They may have a greater chance of surviving short-term difficulties to benefit from an economic recovery.
For example, companies with access to large amounts of liquidity may be better able to survive a period of weak sales. Similarly, companies with a unique product or a lower cost base than their peers may produce a more resilient financial performance that translates into a higher share price.
Unlike gold and Bitcoin, it is possible to accurately value crashing shares. For example, investors can use earnings, income or asset-based metrics to determine whether they trade at a discount to their intrinsic value. By contrast, Bitcoin and gold are dependent on investor sentiment and the outlook for the world economy. Due to their unpredictability and the cheap prices available within the stock market, a portfolio of undervalued shares may have a more positive impact on your plans to retire early.
