Trying to estimate when the stock market will cease falling and recover is almost impossible. The spread of coronavirus and its economic impact is a known unknown. So too is investor sentiment towards the wider stock market.
However, buying shares in high-quality FTSE 100 stocks today could be a good move. This may not prove to be the very lowest ebb of the FTSE 100’s crash. But the index’s valuations and track record suggest that now is a buying opportunity for long-term investors.
Market crash
The FTSE 100’s recent decline is among its fastest ever recorded. Although there have been some signs of recovery in between its declines, the overall trend has generally been downwards. This situation may persist over the coming weeks and months depending on how coronavirus ultimately impacts the world economy.
Judging exactly when to buy during such a period is fraught with difficulty. News flow is highly changeable, and investors risk waiting too long and missing out on the early stages of a market comeback.
Low valuations
As such, focusing on the long-term value available in the stock market at the present time could be a good idea. Many of the FTSE 100’s members offer wide margins of safety after recording major falls in their share prices. Compared to their historic averages, their valuations are exceptionally low in many cases. This could mean that, over time, they are able to deliver high returns as their profitability and valuations recover.
Although a sustained recovery may seem unlikely right now, the FTSE 100 has experienced bear markets several times in its past. In some cases, it has taken a number of years for the index to deliver a full turnaround from its decline. But on every previous occasion it has managed to achieve this goal. Therefore, buying shares today while they appear to be cheap in many cases could be a sound means of generating high returns in the long run.
Managing emotions
One of the biggest challenges facing all investors at the present time is managing your emotions. It is easy to worry about the performances of your existing investments, which are likely to have experienced major falls in recent months. This may dissuade you from buying new stocks, thereby reducing your chances of capitalising on the FTSE 100’s low valuation.
However, most investors wish to buy shares while they trade at low prices. In order for the index to trade at a low level, there usually must be a good reason for it to do so. Although this can mean there are short-term risks, the world economy is very likely to recover in the long run.
Therefore, by focusing on the long-term prospects of a diverse range of shares, you can benefit from the cyclicality of the stock market. This process may not be an easy one, but history shows that some of the most successful investors have bought while their peers have been selling. This has helped them to generate relatively high returns in the long run.
