History shows that the next stock market crash is never too far away. Investor sentiment may have improved in recent months, but risks such as the US election and coronavirus could prompt a more challenging period for the stock market.
While this may cause some investors to worry, a market downturn can be an excellent buying opportunity. High-quality shares can trade at bargain prices. Buying them could boost your returns – just as it has done for Warren Buffett over recent decades. It could even improve your chances of making a million.
The next market crash
The next market crash could occur at any time. Risks such as further lockdown measures caused by coronavirus or political uncertainty in North America and Europe may or may not prompt the next bear market. However, since bull markets have never lasted in perpetuity, investors should expect the next bear market to never be too far away.
History also shows that buying cheap shares during bear markets can be a very profitable strategy for long-term investors. A market downturn generally causes a wide range of businesses to trade on valuations that are below their historic averages.
In some cases this is merited, such as where a company has a weak balance sheet or lacks a solid competitive position through which to generate improving financial performance. However, in other cases, a market crash causes weak investor sentiment towards the wider stock market that prompts low valuations among high-quality businesses. Over the long run, they are likely to recover. As such, buying them at low prices can produce high returns.
Following Warren Buffett's lead
Warren Buffett has often sought to capitalise on low prices when a market crash occurs. He has purchased a wide range of undervalued businesses that have economic moats when investor sentiment towards the stock market is relatively weak. Although this strategy has not always led to quick returns for Buffett, his long-term time horizon means that it has provided a significantly higher return than that available from indexes such as the S&P 500 Index (SP: .INX).
Even if you earn a similar return to that of the wider market, investing in a diverse range of shares can lead to a portfolio valued at over a million. For example, the stock market has produced an annual total return of around 8% over the long run. Assuming the same return on a $100,000 investment made today, or a monthly $750 investment, could lead to a seven-figure portfolio over a 30-year timeframe.
However, by waiting for buying opportunities in the next market crash, you could follow in Warren Buffett's footsteps and outperform the market. This may improve your financial outlook as the stock market recovers, and could reduce the amount of time it takes to make a million.
