It’s been over a decade since the last global recession. History shows that no boom period or bull market has ever lasted in perpetuity. As such, with risks such as Brexit, a global trade war and political uncertainty in the US, some investors may be concerned about the prospect of a stock market crash in 2020.
However, history also shows stock markets have always recovered from their downturns. As such, a crash could prove to be a buying opportunity for long-term investors, rather than a reason to be concerned about the short-term prospects for investments.
Volatility
Fears surrounding a global recession may have already contributed to weak performances in indexes such as the FTSE 100 and FTSE 250 during 2019. Both have experienced a relatively high degree of volatility that’s caused some investors to adopt an increasingly risk-averse attitude.
While this standpoint is understandable, since no investor wishes to experience losses over any time period, the reality is the stock market continually experiences short-term volatility. In other words, in any given year it will display sharp upward and downward movements that can cause investor emotions to change rapidly.
In the long run, though, the trajectory of the stock market has been upwards since its inception, thereby providing investors who can look beyond short-term movements with opportunities to generate high returns.
Stock market crash
Clearly, a stock market crash in 2020 would be more worrisome for investors that intra-year volatility. The financial crisis, for example, caused the FTSE 100 to halve in a mater of months.
For investors who maintained a bullish long-term view on equities, however, there were significant rewards to be gained. The FTSE 100, as well as other major indices, such as the FTSE 250 and S&P 500, recovered over the years following the financial crisis. Many of their members now trade at record highs.
Therefore, investors who are able to view a market crash as a buying opportunity, as opposed to a period of losses, can stand to benefit from it. This means that should a major downturn take place in 2020, there could be the chance to buy high-quality businesses at discounted valuations.
Cash holdings
For this reason, holding some cash could prove to be a sound move. While it’s always tempting to remain fully invested in the stock market, successful investors such as Warren Buffett keep a significant sum of cash on hand in case of a market crash.
This strategy may mean lower returns in the short run, but equally it can deliver higher returns in the long run as investors capitalise on lower valuations.
Therefore, while a market crash could occur at any point in 2020 (or, in fact, in the remainder of 2019), the track record of equities shows it can be a moment to capitalise on low valuations in order to generate high returns in the long run.
