There are understandable fears that another stock market crash is on its way. Although it’s almost impossible to predict short-term movements in the market, I wouldn’t be surprised to see the FTSE 100 plummet again soon.
You see, the UK economy contracted by 20.4% in April as the nation was told to stay at home. Yet despite this, investors were still buying shares, and the FTSE 100 grew by 8% in April.
Although I believe the last stock market crash presented a great opportunity to buy shares in quality companies at low valuations, the more recent rate of growth in the market might seem overly optimistic.
The next market crash?
In Beijing, dozens of new coronavirus cases have emerged and residents have been stopped from non-essential travel outside of the area. This has sparked fears that a second wave of the virus could occur.
In the UK, the recovery of the economy and customer confidence haven’t been truly tested yet. It is also unknown whether spending patterns will have altered. After living for months in lockdown, will consumers’ values and priorities have changed?
For instance, the volume of online shopping has increased, and if this trend continues, this could signal even tougher times for already struggling high streets.
Carry on investing in cheap shares?
Grim times, certainly. But time to stop buying shares? Not at all! Despite fears of a second stock market crash, I think now is still a great time to invest in cheap shares. However, it is wise to exercise caution. There are a few things that might mitigate the risks of a falling market.
The effect that travel restrictions and lockdown measures have had on different industries has highlighted the importance of a well-diversified portfolio. Many travel and leisure share prices have been hammered this year, whereas some tech stocks have flourished.
At the same time, it is important to only invest in companies that you understand. This is a rule of investing legend, Warren Buffett. This strategy meant that he kept away from tech stocks during the dotcom bubble in the 1990s, which eventually popped in 2001.
What will the FTSE 100 do next?
Asking if the market will crash soon is the wrong question. It is possible that it might. But it is also possible that it might not. By holding off, you could be waiting for a future buying opportunity that might never happen.
And anyway, investing in stocks is best done with a long-term outlook. This allows bumps and market turbulence to be ridden out. And the 2020 market crash will seem irrelevant one day (except for the great opportunity it offered). The history of the FTSE 100 has shown that after each crash it has suffered, the market has eventually recovered. Although there is much noise from the business press, sometimes it is best to ignore this and follow your own logic.
To my mind, now is the time to identify your target stocks and to work out the price you’d be happy to pay for them. If they looks cheap already, then why wait to buy the shares?