A number of risks currently face investors that could cause another market crash over the coming months. For example, there could be a second wave of coronavirus across many of the world’s major economies. There may also be rising trade tensions between the US and China that cause investor sentiment to weaken.
Therefore, now could be the right time to focus your capital on high-quality shares that have a higher chance of surviving an economic downturn. Through taking a long-term view, and keeping some cash on hand, you could benefit from another stock market crash.
Holding cash in a market crash
Having some cash available during a market crash can be highly beneficial to long-term investors. It provides peace of mind so that you can pay for unexpected costs at a time when job security may be low. It also means that you are in a position to capitalise on lower valuations across the stock market.
Clearly, holding large amounts of cash for the long term is unlikely to produce high returns. But, at a time when the prospects for the world economy are uncertain, ensuring you have liquidity within your portfolio could be a major advantage should stock prices become more attractive over the coming months.
High-quality businesses may be in a better position than their industry peers to survive another market crash. For example, companies with solid balance sheets that contain little amounts of debt may be under less pressure to deliver sales and profit growth on a relative basis. Likewise, companies with wide economic moats may be less affected by a period of weaker growth for the world economy.
Furthermore, high-quality businesses may be able to take advantage of weak operating conditions to strengthen their competitive positions. For example, they may be able to take market share from their peers to improve their profit growth potential over the coming years. This could aid their share price performances, and boost your portfolio returns.
A long-term view
A market crash can cause investors to panic about paper losses within their portfolio. However, a loss is not realised until a stock is sold. As such, holding your stocks for the long term could be a means of allowing them to recover from short-term declines in their valuations.
Similarly, when buying stocks it could be a sound move to have modest expectations about their prospects over the short run. The challenging outlook for the economy means that many stocks may struggle to post improving levels of profitability. However, with the world economy and the stock market having strong track records of recovery over the long run, adopting a buy-and-hold strategy could allow you to benefit from improving performances over the coming years.
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Motley Fool UK 2020