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Another stock market crash may be ahead. I’d take these 3 steps when buying FTSE 100 shares

Peter Stephens
Arrow descending on a graph portraying stock market crash

The FTSE 100’s 2020 market crash may not yet be over. The world economy faces a hugely challenging period that is likely to lead to recessions in many major economies, as well as higher levels of unemployment and weak consumer and business confidence.

As such, investor sentiment could easily decline in the short run in response to disappointing financial performances from large-cap shares.

However, by focusing on strong businesses, ensuring you are diversified and investing regularly, you can build a solid portfolio of FTSE 100 shares that delivers high returns in the long run.

Regular investing in the FTSE 100

Investing regularly in FTSE 100 shares is a strategy that may be underrated by some investors. After all, predicting the near-term outlook for the index is exceptionally difficult. Therefore, buying smaller amounts of stocks with your capital on a more regular basis could be a shrewd move. It may enable you to take advantage of potentially lower share prices over the coming months that allow you to obtain a wider margin of safety.

Furthermore, investing smaller amounts on a regular basis may help you to overcome the emotions that naturally occur during a market crash. For example, if you had invested all of your available capital prior to a market crash, you are likely to feel worried about the paper losses on your investments. By contrast, investing regularly during a market crash could help you to overcome fear and worry, since you are investing in the same stocks but at increasingly attractive prices.

Diversification

At the present time it may be too soon to know which FTSE 100 sectors will emerge in a strong position from the current economic crisis. Certainly, some industries, such as online retail and healthcare, look set to deliver high growth rates in the coming years. But other industries such as oil & gas, consumer goods and travel & leisure face uncertain futures that are difficult to accurately predict.

As such, it may be a worthwhile move to diversify your portfolio across a wide range of sectors. This could reduce your risk of investing in industries that have challenging futures, while increasing your chances of buying companies with prosperous long-term outlooks.

Business strength

A company’s balance sheet strength is always an important consideration for investors. At the present time it is perhaps more crucial than ever, since many companies will need their cash resources and access to debt to survive the coming months.

Therefore, buying FTSE 100 companies that have sufficient access to liquidity and the capacity to cut costs could be a sound move. It may help you to invest in those businesses that have the best chance of benefiting from the likely long-term recovery. This has always occurred after every previous FTSE 100 market crash, which could make the coming months an opportunity to buy high-quality shares at attractive prices.

The post Another stock market crash may be ahead. I’d take these 3 steps when buying FTSE 100 shares appeared first on The Motley Fool UK.

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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 2020