Buying cheap stocks in a second market crash could lead to high returns in the long run that improve your retirement prospects.
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The chances of a second market crash could remain elevated over the coming months. Rising unemployment coupled with weak GDP growth may cause investor sentiment to decline.
While this may cause paper losses for investors, it could also present a rare buying opportunity. Sharp stock market declines are relatively uncommon, and have historically been followed by sustained bull markets.
As such, buying cheap stocks in a bear market may improve your long-term financial prospects, and could even help you to retire early.
A second stock market crash
Considerable risks remain in place that could cause a second market crash. As well as the prospect of a further rise in coronavirus cases, other threats could derail the financial performances of companies and cause investor sentiment to weaken.
For example, the US election later this year may lead to fiscal policy changes that cause investors to adopt a more cautious attitude towards equities. Similarly, Brexit could lead to reduced business confidence that acts as a short-term drag on investor sentiment.
Therefore, investors may yet experience another opportunity this year to buy stocks at extremely low prices due to a market crash.
A rare event
Even though the prospects for a second market crash may be relatively high, history shows that bear markets are uncommon. In fact, the last major decline in stock prices occurred over a decade ago. Therefore, most investors are only likely to experience a handful of bear markets during their lifetimes.
This means that taking advantage of the low prices created by a stock market decline could be very important to your retirement prospects. They may enable you to buy high-quality businesses at relatively low prices. History shows that no bear market has ever lasted in perpetuity – even if at the time it felt as though a bull market was unlikely to ever return. Therefore, through buying a diverse range of stocks during rare opportunities when they are cheap, you could improve your prospects of retiring early.
While stock prices could be volatile for some time after the recent market crash, equity prices are likely to rally over the long run. With most investors having a number of years left until they plan to retire, they are likely to have sufficient time for their holdings to recover – even if there is a second downturn this year.
Therefore, if a high-quality stock is trading at a low price today, buying it for the long run could be a shrewd move. Certainly, a second market decline could make it even cheaper. But, in many cases, that outcome has been priced in by investors through lower valuations. Therefore, building a portfolio over the coming months, and continuing to add to it even if there is a further bear market, could be a sound overall strategy.
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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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