The potential for a second stock market crash currently appears to be relatively high. Risks such as the ongoing coronavirus pandemic and the lockdown measures it’s causing have come. Meanwhile, political uncertainty is at a high level in Europe.
While a further market downturn could cause paper losses for investors, it may also provide long-term buying opportunities. Purchasing cheap UK shares has historically proved to be sound strategy, due to the stock market’s recovery potential.
As such, falling stock prices could provide greater scope for an investor to generate high returns in the long run. They may even increase their chances of making a million.
Stock market crash part two: a rare buying opportunity
While a second stock market crash isn’t guaranteed, it appears to be more likely than it has been for some time. Risks such as the effect of lockdown measures on a wide range of industries could cause weaker investor sentiment that produces lower stock prices over the short run.
Of course, the stock market has experienced a variety of declines and corrections in its history. However, bear markets are relatively rare. The last major bear market, prior to this year’s decline, was during the global financial crisis over a decade ago. Therefore, investors are unlikely to experience frequent opportunities to buy cheap UK shares for the long run.
Buying cheap UK shares in a downturn
Clearly, buying UK shares in a stock market crash is likely to be a tough task for even the most seasoned investors. It’s certainly natural to fear losses. This can lead investors to avoid purchasing FTSE 100 and FTSE 250 shares when they face challenging future prospects.
However, buying high-quality stocks when they’re priced at low levels can be a sound long-term move. The stock market has always recovered from its various bear markets and declines throughout its history.
But think about buying a diverse range of companies with decent balance sheets and strong market positions. This way an investor may be able to overcome short-term declines to benefit from an improving economic outlook in the coming years.
Making a million
In fact, investing in cheap UK shares after a stock market crash could well improve an investor’s chances of making a million. The stock market’s past total returns are around 8% per annum. This means that it would take around 30 years for a £100,000 investment to be valued at over seven figures.
However, by investing when the stock market is at a low ebb during a downturn, an investor could potentially obtain a higher rate of return than the wider market. This may eventually reduce the time it takes to generate a seven-figure portfolio, as a likely economic and stock market recovery takes hold.