A second stock market crash could realistically occur over the coming months. Numerous risks face the world economy that could derail its growth prospects and cause investor sentiment to weaken.
Furthermore, the stock market has a long track record of high volatility. This means that always being ready for a sudden fall in share prices could be a sound move.
Of course, many stocks currently offer wide margins of safety, and may therefore be worth buying today despite the risk of a further drop in the price levels of indexes such as the S&P 500 and FTSE 100.
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A second stock market crash
The second half of 2020 could include a second market crash after the initial decline and subsequent rebound recorded in the first half of the year. Risks such as an increase in coronavirus cases, as well as geopolitical uncertainty in the US and Europe, may contribute to more challenging operating conditions across many sectors. This may cause investor sentiment to weaken, which could disrupt the share price growth prospects for many businesses.
Of course, the stock market has a long history of high volatility. Even if a further decline in share prices does not occur over the near term, the next bear market is almost certain to take place in the coming years. No stock market index has ever risen without experiencing downturns and bear markets, which means that investors should always be ready to react to attractive stock prices that may only be available for a short time period.
Having some cash available to invest whenever a market crash occurs could be a potential solution to the prospect of a decline in share prices. It may act as a drag on your portfolio's performance in the short run due to the low returns on savings accounts, but could allow you to capitalise on undervalued opportunities.
Buying shares today
Of course, another market crash may not occur for many years. Investor sentiment has improved in recent months, and the risks facing the world economy may already be priced in to market valuations.
As such, now could be the right time to buy high-quality businesses at low prices. Certainly, some sectors have risen significantly in value over recent months, and may now offer unfavourable risk/reward opportunities. However, other sectors still appear to be undervalued based on their long-term recovery prospects and the financial positions of their incumbents.
Therefore, investors who can adopt a long-term time horizon and look beyond short-term risks of a second market crash may wish to add stocks to their portfolios. This may not lead to high returns in the coming months, but may significantly improve your portfolio's value as the world economy and stock prices gradually recover from an extremely challenging period.
