The 2020 crash highlighted the extreme volatility the stock market can present. Indexes such as the FTSE 100 and S&P 500 declined rapidly in a short space of time. Since then, some stocks have recovered. However, many others continue to be viewed negatively by investors as a result of an uncertain economic outlook.
As such, there could be buying opportunities that rarely present themselves. Through taking a long-term view and buying a diverse range of undervalued stocks today, you could improve your financial prospects.
Stock market crash 2020: an unusual event
The 2020 stock market crash was a very rare event. It prompted a bear market, with many indexes across the world slumping by over 20% in a matter of weeks. The last time such a large fall was experienced across global equity markets was during the global financial crisis in 2008/09. Prior to that, the dotcom crash and an uncertain geopolitical outlook in the early 2000s also prompted severe declines for global stock markets.
Therefore, in the past 20 years, there have been only a small number of instances where stock prices have declined severely en masse. This means that buying opportunities such as those still available today are relatively rare. Investors who can go against the consensus views of their peers and buy high-quality shares at cheap prices may generate impressive returns in the long run.
Today’s buying opportunities
While some shares have recovered following the stock market crash, many others continue to trade at low prices. Investor sentiment towards sectors that face an uncertain near-term outlook is especially weak. Banks, retailers and consumer goods companies are mostly trading at low prices. In some cases, they’re trading significantly below their historic averages. This suggests they offer a wide margin of safety, and could deliver high capital returns in the long run.
Of course, the economic outlook is likely to remain uncertain for many months. Therefore, it’s sensible to diversify across a range of sectors. With consumer sentiment apparently changing rapidly in response to lockdown measures put in place across many major economies, having exposure to a range of industries within your portfolio could be a profitable move.
A long-term perspective
While there may yet be another stock market crash, the reality is that such buying opportunities are few and far between. Investors who use them to their advantage through purchasing undervalued stocks can generate market-beating returns. Over time, they can make a real difference to your portfolio’s performance and your financial outlook.
Therefore, while buying shares may seem like a risky move today, it could be a logical step for any long-term investor to take. The stock market’s track record of recovery suggests that many undervalued stocks will deliver recoveries as the economic outlook improves.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020