In addition, there have been relatively frequent market declines in the past. Therefore, planning their occurrence ahead of time could be a prudent strategy.
By buying the best companies at the lowest prices today, you may be in a strong position to weather a market downturn and benefit from its rebound.
The risk of a second stock market crash
As already mentioned, a second stock market crash could realistically occur in the short term. Although many stock prices have rallied after the rapid downturn in global equity markets earlier this year, the outlook for the global economy is extremely challenging. Rising unemployment in many major economies, weak consumer confidence and poor financial performance by many companies can all lead to investors becoming increasingly risk averse.
Additionally, upcoming events such as the US election and Brexit can affect trading conditions for some companies and sectors. In addition, the coronavirus pandemic is a known unknown that could get better or worse before the end of the year. Together, these risks can be enough to result in greater sales among investors on the stock market – especially after the recent uptrend.
A stock market crash is of course not a new event. Stock prices have been volatile at times and have been frequently influenced by political, economic and other events that change the prospects for a wide variety of companies.
It is therefore advisable to ensure that your portfolio is always prepared for a possible price decline. This means your stocks shouldn’t be overvalued. If so, a lack of margin of safety can make them suffer more than companies with ratings that consider the potential for a downturn. Likewise, holding companies with the financial strength and market position to overcome a period of slower revenue growth could be an easy way to prepare for an economic downturn or bear market.
Benefit from poor stock market performance
A stock market crash could also offer long-term investors buying opportunities. Cheaper stocks can produce superior capital gains compared to the market. And, as the recent bear market has shown, in many cases during a downturn, high quality companies have low valuations due to weak investor sentiment relative to the broader equity market.
Hence, holding cash in preparation for the next downturn might be a smart move. This can mean you can buy stocks at cheaper prices in the long run. Given the current high level of risk, this can also provide security before the next fall in share prices.
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