The stock market crash of 2020 doesn’t seem to have finished yet. Yesterday, there was a big move down in the American stock market and the FTSE 100 index looks weak now.
Maybe further falls will come. It looks like the main thing worrying investors is the resurgence of Covid-19 infections around the world. And that’s understandable because the lockdowns in the spring damaged the world economy and caused the FTSE 100 to plunge below 5,000. The big fear could be that the index may revisit those levels again if governments impose further lockdowns.
How I’d take advantage of the stock market of crash 2020
With all that doom and gloom around, I admit the last thing I feel like doing is investing money in the stock market. But that’s my emotions talking to me. My rational mind, on the other hand, knows that some of the best investments I’ve ever made felt uncertain in the beginning.
And, of course, great and successful investors such as Warren Buffett in the US are well known for buying shares in good businesses when the market is marking the price down. Indeed, buying at smart, lower prices can prove to be a lucrative move if recovery and growth drive the underlying business in the years that follow.
Indeed, operational progress can cause share prices to rise to reflect the rising value in a business. But, on top of that, valuation multiples, such as the price-to-earnings rating, can increase in the good times too. And that’s a potential double boost for shares in my portfolio if I’ve bought them at lower prices.
One way of getting decent exposure to the potential in the stock market is to buy collective funds. I’d go for managed funds and investment trusts. But I also reckon low-cost tracker funds are good vehicles for compounding wealth over time. Indeed, many funds have the option to accumulate dividends, which means the dividend income is automatically ploughed back in. If I do that, those dividends could be a big driver of my returns over time.
Targeting smoother annualised returns
Meanwhile, I reckon two things could help me to deal with the possibility that the markets may fall further before they recover. The first is to adopt a long-term perspective. Indeed, 20 years from now, my guess is today’s weakness will hardly show in my record of annualised returns. The second is to invest money regularly so I can take advantage of the process of pound-cost averaging. For example, if the stock markets fall, I’ll get more units for my money, if they rise, I won’t be investing everything near the top.
But I’m also keen to include the shares of individual companies in my portfolio. If I choose carefully, there’s a chance the returns from great stocks will outperform the general market. And in the current environment where many stocks are falling in price, I’d be most tempted by businesses with defensive, cash-producing operations such as GlaxoSmithKline, Diageo, Cranswick, Britvic, and AG Barr. I reckon a basket of shares like those could serve me well over the next 20 years.
The post Stock market crash 2020: Why I’d buy these cheap UK shares now while I have the chance appeared first on The Motley Fool UK.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended AG Barr, Britvic, Diageo, and GlaxoSmithKline. 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