Investing in stocks after the recent market crash could be viewed as a risky move by many investors. After all, there is the potential for stock prices to experience a prolonged period of volatility, and even decline.
However, by focusing on company fundamentals you could find the most attractive businesses that are most likely to survive the economic challenges that are ahead.
Furthermore, by adopting a long-term view of your holdings and diversifying across a range of sectors, you can improve your return prospects over the coming years.
Company fundamentals
Buying high-quality businesses is likely to be more important now than it has been in recent years. The world faces a period of significant economic uncertainty that could put pressure on a range of sectors and businesses.
As such, before buying stocks today, it could be a sound move to assess their financial strength. Companies with lower debt levels and strong cash flow may, for example, have a better chance of surviving the current economic downturn. Likewise, businesses that have wide economic moats may be better equipped to take part in a likely economic recovery over the long term.
Through buying strong and stable businesses you can not only reduce your portfolio risks, but improve your chances of generating high returns in the coming years.
Diversification
Diversifying is a key part of investing. But it is probably even more relevant today than it has been over recent years. Some sectors and regions of the world could experience greater challenges from coronavirus than others. Therefore, it is logical to spread the risk of your portfolio across a wide range of industries and geographies.
Diversifying is more accessible than it ever has been as a result of a fall in the cost of buying shares. Most investors can now purchase a basket of stocks that operate in different areas. That should improve the risk/reward profile of their portfolios through reducing their reliance on a small number of businesses.
Long-term focus
The stock market could experience further falls in the short run. Since coronavirus is an unprecedented crisis facing the world economy, and its effects may be felt for a prolonged period of time, investor sentiment could easily weaken over the coming months.
However, investors who buy now on a long-term basis could generate high returns. Therefore, it could be a good idea to only invest capital that you will not need in the medium term. This may mean that you leave a modest proportion of your capital in a cash savings account for peace of mind.
Yes, cash may produce low returns. But it may enable you to capitalise on low valuations across the stock market without worrying about the short-term performance of your portfolio. In the long run, this strategy may enable you to survive the current crisis. And it could help you to capitalise on the stock market’s low valuation.