The 2020 stock market crash has caused many investors to experience significant paper losses on their portfolios. In the short run, further declines cannot be ruled out due to the possibility of a second wave of coronavirus and its potential impact on the world economy.
However, now could be the right time to buy high-quality stocks while they trade on low valuations. By adopting a long-term view and reinvesting dividends received where possible, you could capitalise on the recent market crash to increase your chances of making a million.
A long-term view
As mentioned, the short-term prospects for the stock market are highly uncertain. Previous bear markets have included brief market rallies that have not lasted for a sustained period of time. Therefore, while many stocks have risen from their recent lows, there is the potential for them to deliver disappointing returns in the coming months.
As such, adopting a long-term view towards your stocks could prove to be a highly worthwhile move. The stock market’s past performance shows that it often has periods of negative growth, but in the long run it has historically delivered relatively high returns compared to other mainstream assets.
By accepting that your investments could experience difficult periods over the short run, and allowing them the time they need to deliver high returns, you could increase your portfolio’s growth rate.
Focusing on value
It can be tempting to simply buy the cheapest stocks you can find in a market crash. However, some industries and businesses may fail to make a comeback from the current difficulties they are facing. They may, for example, have high debt levels or be void of a clear competitive advantage over their peers.
Therefore, it is important to consider the quality of a business, as well as its price, before buying it. In doing so, you can unearth the best value stocks that are on offer. They may be better placed to survive the upcoming economic challenges facing the world economy, as well as deliver a strong recovery relative to their peers over the long run.
Reinvesting dividends
A large proportion of the stock market’s historic total returns have been derived from the reinvestment of dividends. Therefore, reinvesting your income returns whenever possible following the recent market crash could boost your chances of making a million.
With many stocks currently trading on low valuations following their recent declines, now could be an opportune time to make use of your dividend income stream through buying high-quality stocks at low prices. You may even wish to reinvest in your existing holdings through an automated dividend reinvestment service. Over time, this could lower your average purchase price and enable you to benefit to a greater extent from the stock market’s likely long-term recovery.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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