The recent stock market crash may have caused paper losses for many investors. After all, it was the largest fall in stock prices since the global financial crisis occurred over a decade ago.
However, it may also present an opportunity to buy high-quality businesses while they trade on low valuations. Over time, they have the capacity to deliver sound share price recoveries in many cases.
This could make them significantly more appealing relative to other mainstream assets. As such, now could be the right time to build a diverse portfolio of stocks to benefit from their improving total returns in the coming years.
Low valuations after a stock market crash
Although some share prices have recovered after the stock market crash, a large number of high-quality businesses continue to trade on low valuations. This suggests that they offer wide margins of safety, which could translate into impressive capital returns over the coming years.
A strategy of buying companies when they trade at a discount to their intrinsic value has generally been a sound means of generating market-beating returns in the past. It enables investors to use the stock market’s fluctuations to their advantage, in terms of buying at low prices and potentially selling at higher prices in future.
With the stock market crash causing extremely challenging trading conditions for many industries, some businesses with solid balance sheets and strong track records of profit growth currently trade at low prices. This could make today the ideal time to buy them, as they commence the process of rebuilding after the present economic difficulties they face.
Of course, low share prices after the stock market crash are unlikely to remain present in perpetuity. The stock market has an excellent track record of recovering from even its very worst declines to post new record highs.
While a recovery may seem unlikely for some businesses that face difficult operating conditions, over time fiscal and monetary policy stimulus is likely to lead to world economy back to stronger levels of growth.
For example, the last stock market crash in 2008/09 caused many investors to become bearish about the prospects for the economy and stock market. However, within a few years, stock prices had generally recovered and investors who bought equities ahead of their turnaround generated high returns in many cases.
The stock market crash may have dissuaded some investors from buying equities. It may even have convinced them to seek less risky assets such as bonds and cash. However, with low interest rates likely to persist over the medium term, the returns on cash and bonds may prove to be very disappointing.
Similarly, property investments may fail to keep pace with stocks when it comes to total returns. High house prices in many parts of the world could mean that now is the right time to buy undervalued stocks ahead of a likely recovery. They could make a bigger impact on your financial prospects over the long run.