The recent falls in the FTSE 100 and FTSE 250 may have caught many investors by surprise. However, it’s not an unusual event, since both indexes have experienced significant declines over short time periods since their inceptions.
As well as teaching investors that no bull market lasts forever, the recent stock market crash also highlights that having a long-term view can be beneficial to your overall financial prospects. And, through diversifying, you can withstand even the very worst share price declines to post impressive returns in the long run.
Cyclicality
Just a handful of weeks ago, the outlook for the stock market was relatively positive. Certainly, there were risks, such as Brexit and US political uncertainty. But investors were generally in buoyant mood.
The decline in the FTSE 100 and FTSE 250 highlights that stock markets are never static. Even though a bull or bear market may seem as though it’s likely to last forever, it’s never done so. As such, being aware of valuations and the scope for capital growth given past performance is a sound idea.
It can enable you to see through investor sentiment. That means either holding off on the purchase of expensive stocks, or buying undervalued stocks while other investors are downbeat about their prospects.
Long-term focus
The stock market’s recent crash has also highlighted the importance of adopting a long-term view of investing. For example, if you’ve a one-year time horizon then the current state of play is likely to prove very worrisome. You may experience realised losses over the coming months. However, if you’re more interested in the stock market’s performance over the next five or 10 years, you’re more likely to view recent falls as a buying opportunity.
It’s never easy to focus on the long term. Naturally, investors worry when their portfolio valuations come under pressure. However, by accepting the volatility of shares as something that is simply part of the fabric of the stock market, it’s easier to overcome fear and remain calm when prices fall.
Diversification
The recent decline in oil prices highlights the importance of diversification. If you’d focused your portfolio on oil and gas companies, you’re likely to be experiencing a hugely challenging scenario. Weaker demand for oil, caused by a slowdown in global economic activity due to coronavirus, could mean the sector experiences major short-term losses.
The sector may be relatively attractive due to its extra-low share price. But it’s nevertheless crucial to have exposure to many other industries. This helps to reduce company-specific risk within your portfolio. It also enables you to gain exposure to other sectors that could offer capital growth potential.
This may improve your portfolio’s overall performance and help you to enjoy greater returns in the coming years.