While some investors may fear the prospect of a second stock market crash, it could prove beneficial to your long-term financial outlook. A fall in stock prices can present buying opportunities, since high-quality businesses may trade at a discount to their intrinsic value.
In fact, buying undervalued stocks and holding them over the long run could improve your prospects of building a portfolio valued in excess of a million.
Stock market crash round two
The potential for a second stock market crash continues to be relatively high. The coronavirus pandemic has, unfortunately, persisted throughout recent months. It could continue over the near term, which may lead to further lockdown measures being put in place. In turn, they may put further pressure on the economic outlook.
There are also geopolitical risks in a number of regions across the world. For example, trade tensions between the US and China remain high. Similarly, the US election could cause investor sentiment to weaken, while Brexit is now just a few months away. Investors may determine that a more careful stance is required in response to these risks. This could lead to a second stock market crash over the coming months.
Buying opportunities among UK shares
A second stock market crash would cause investors to experience paper losses. However, they’re likely to be short-term in nature. The past performance of the stock market shows it has always recovered from declines to return to record highs. Therefore, buying UK shares while they’re undervalued for a short time period could be a profitable strategy.
In stock market downturns and bear markets, share prices can deviate significantly from their intrinsic value. In other words, some companies may trade at prices that are substantially lower than their true worth. This may be because of weak investor sentiment towards the stock market in general, or towards a specific sector. This situation provides investors with the chance to buy the best UK shares at exceptionally low prices, thereby increasing their potential to generate high investment returns in the long run.
Making a million
Cheap UK shares purchased in the aftermath of a stock market crash can produce high returns in the long run. They may even outperform the stock market’s annualised historic return of 8% (including dividend reinvestment). Even assuming an 8% annual return as per the stock market’s past performance, a £100,000 investment in a diverse portfolio of shares could easily become a £1m portfolio within 35 years.
However, judging by previous downturns and their subsequent recoveries, obtaining a higher return than that of the market is an achievable goal for many investors. This could shorten the amount of time it takes to turn an initial investment in UK shares into a seven-figure portfolio.