There could be another stock market crash. The performances of FTSE indices seem to hinge on the next announcement from the Government. Markets are frequently on the back foot. Volatility is high and uncertainty is everywhere. Many investors are cautious and waiting to see what’s going on before risking limited resources on buying cheap shares. That’s the market psychology at present.
However, I think buying shares when they’re cheap makes a stock market crash the least risky time to invest. Moreover, it also makes it the best time to buy stocks if you want to maximise your future returns.
Why buy cheap shares now?
After a stock market crash, many investors dive into so-called safe-haven assets, such as gold, bonds, or stable currencies like the US dollar.
I always find this strange because surely the point of a safe haven is that it’s ready in case of troubled times? Trying to get into one after the event will likely be costly. After the previous crash in the spring, demand for these assets increased. Consequently, the prices of many safe havens are already high. But in stark contrast, demand for most stocks dropped and is still subdued.
The good news is that this means you can still buy cheap shares in many quality FTSE-listed companies to await the recovery. Moreover, the past performance of the Footsie shows it’s redeemed itself after every dip.
The long-term overall trend is upwards. And although there may be short-term bumps on the road to recovery, as the economy recovers, it’s highly likely the FTSE 100 and FTSE 250 will too.
In the past, investors who took the buying opportunities presented to them by market crashes will likely have generated high returns.
Don’t miss the opportunity to maximise your returns
Fortunately for the economy, a stock market crash doesn’t occur too often. But for an investor, it’s a rare chance to make future capital gains through buying cheap shares.
When shares are on sale, your margin of safety is larger. The margin of safety is effectively how much of a share’s price is backed by a firm’s assets, and is not dependent on hopeful ever-increasing future earnings.
In other words, you’re buying a tangible amount of company with each share, and not just future optimism.
For me, these are firms where assets are at least double the liabilities and long-term debt isn’t more than working capital. These shares have staying power in times of uncertainty.
Moreover, these same shares also have recovery potential for capital gains.
By investing regularly and putting any gains back into your investments, your chances of maximising your returns are much improved… as they are by investing over the long term. The earlier you start, the lower the share price, and the longer you have to watch it climb.
Yes, volatility is currently high and this is often associated with risk. But you can manage your risk of losing money by using a margin of safety in your investments. After a stock market crash, your margin is much higher, as is the recovery potential.
Don’t waste the opportunity to maximise your returns by buying cheap shares, and don’t give in to market psychology.
Rachael FitzGerald-Finch 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.