The FTSE 100’s performance may have been somewhat disappointing over the past few years. However, it has been in a bull market since the financial crisis around a decade ago.
As such, some investors may feel that it is due a period of decline. After all, no bull run has lasted forever, and there are various risks facing the world economy that could cause investor sentiment to deteriorate.
However, even if the FTSE 100 goes on to experience a market crash over the coming months, it could be a positive event for long-term investors. It may present a buying opportunity for these three reasons.
Favourable risk/reward ratio
The goal of most investors is to buy shares when they are low, and sell them when they trade at high prices. For the first part of that strategy to occur, there must be a reason for shares to trade at low prices. Historically, this has coincided with periods of economic uncertainty. As such, an investor may be able to buy high-quality stocks while they trade on low valuations.
The impact of buying undervalued shares on a portfolio’s risk/reward ratio could be significant. It may mean that investors have priced in the potential risks facing a business, and that its recovery potential has not been adequately accounted for. In the long run, this may lead to higher returns for investors who are able to buy stocks during market downturns.
The stock market has always recovered from its bear markets. Even the most savage of economic challenges have been overcome, and now appear as a brief decline on the long-term charts of major indexes such as the FTSE 100.
At the time of market shocks, of course, it feels as though the outcome may be somewhat different. A range of investors may determine that the difficulties facing the world economy are too great, and that stock markets will never recover. However, a brief glance at history shows that while it may take time for a recovery to take hold, it is highly likely. This could give investors a reason to buy shares during a market crash, since they are likely to recover and produce high returns over the long run.
For long-term investors, equities are likely to provide the most appealing return profile. Certainly, cash, bonds and property have their merits for some investors. But for someone who has a long-term time horizon the high-single-digit annual returns of shares may make them the most appealing asset to hold.
Certainly, buying during a market crash may mean there is short-term volatility. But stocks have historically offered the most appealing growth outlook of mainstream assets, which could mean that a severe decline in the FTSE 100 makes for an enticing buying opportunity.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019