A market crash always seems obvious after the event. However, accurately predicting when a major fall in share prices will take place can be challenging. Stock markets, though, have always experienced periods of extreme volatility that can cause many investors to become disillusioned with the idea of buying and selling shares.
By contrast, a buy-to-let may seem to be a more robust investment. Even though house prices have disappointed in the last couple of years, they are still moving higher. And even if they do experience falls, it is usually much slower and less sharp than the price changes of FTSE 100 companies.
Despite this, shares could offer superior returns than a buy-to-let. Moreover, a stock market crash could create even more favourable conditions for long-term investors to generate high returns.
Buying opportunities
The FTSE 100 has fallen by over 10% since it reached a record high in May. While this may not count as a stock market ‘crash’, it is nevertheless a correction which is halfway towards being a bear market. As such, it is clear than many investors are concerned about the outlook for share prices due to risks facing the world economy.
The history of the FTSE 100 shows that it is not the first time that a 10% or more price fall has been experienced in a relatively short space of time. Previous examples include the dotcom bubble bursting and the financial crisis. Following both of those events, there was a volatile period, but after a number of years, the index recovered to reach higher highs. As such, it seems likely that the index will do likewise following the recent fall, with it having a solid track record of recovery.
Buying following a market crash may seem to be illogical, but it can mean that the investment odds are stacked further in an individual’s favour. And while volatility may be high, for a long-term investor who is more concerned about their portfolio performance over 10 years rather than 10 days, this may not be a major concern.
Logistics
While the recent fall in share prices could increase the appeal of owning a range of FTSE 100 companies from a risk/return perspective, buy-to-lets continue to face a challenging outlook. Tax changes mean that their appeal could decrease over the medium term, while the prospect of a rising interest rate means that mortgage availability may be lower as affordability checks could become more stringent.
The housing market may also suffer from Brexit, with Mark Carney recently stating that significant falls in house prices could be ahead if no deal is signed between the UK and the EU. And with the market being supported by policies such as Help to Buy, a change in government could lead to a period of uncertainty for investors in buy-to-lets.
As such, while volatility and market crashes may seem to be negatives of buying shares when compared to the relative stability of house prices, the risk/return ratio on offer from the stock market could make it a more appealing place to invest in the long run.