Investing money in shares after the stock market crash may be viewed as a risky idea by some people. After all, the world economy’s outlook is very uncertain, and investor sentiment could quickly change in response to risks such as Brexit and coronavirus.
However, low valuations among high-quality businesses may mean that now is the right time to start investing in equities. Over time, they could deliver high returns that improve your financial circumstances.
Diversifying after the stock market crash
The stock market crash and subsequent recovery has shown that investing in a small number of shares can lead to elevated levels of risk. For example, some companies have rebounded strongly following the market downturn. They face improving financial outlooks due to trends such as increased online opportunities or a move towards a greener economy. However, other businesses face difficult outlooks that are reflected in their disappointing share price performances in 2020.
Therefore, it is crucial to always diversify across a range of businesses, sectors and geographies. This reduces your reliance on a small number of investments. Otherwise, you will have too much exposure to one company, industry or region that may lead to a disappointing portfolio growth rate. With the cost of sharedealing having fallen in recent years, diversifying is easier and cheaper for all investors.
Buying the best companies
The stock market crash has been largely caused by a weakening in the economy’s outlook. This could mean that many companies face difficult operating conditions that compromise their financial performances over the coming months.
Therefore, it is important to buy high-quality businesses. They are usually those companies that have sound financial positions through which to overcome difficult trading conditions. They are also likely to have a competitive advantage over their peers that may allow them to occupy a more dominant position in their chosen industry as the economic outlook improves.
With the threat of a second stock market crash likely to remain in place for the foreseeable future, the best stocks may offer the most attractive risk/reward opportunities. As such, they could be the best investments to make right now.
Cheap stocks can offer long-term growth
The stock market crash has caused many companies to trade at cheap prices compared to their historic averages. In some cases, their current valuations are undeserved due to their balance sheet strength and economic moat. Therefore, buying them can produce impressive gains over the long run as investor sentiment recovers.
Buying cheap stocks can improve your prospects of outperforming the stock market. Since the stock market has produced a high single-digit annual return over recent decades, this could mean that you obtain a very attractive growth rate. When compounded over the long run, this has the potential to boost your portfolio and improve your financial situation.
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Returns as of 6th October 2020
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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