Buying crashing stocks to make a million may not be an appealing idea to many investors at the present time. The uncertain global economic outlook may cause them to buy other assets, such as gold and Bitcoin, in the hope of generating higher returns than those offered by the stock market.
However, the track record of equity markets suggests that they offer excellent long-term recovery potential. As such, buying cheap stocks today, and holding them for the long run, may be a better means of obtaining a seven-figure portfolio than purchasing gold or Bitcoin.
Crashing stocks with recovery potential
While it may be natural to initially view crashing stocks as potential risks to your financial prospects, they could offer excellent long-term capital returns. Certainly, this process is likely to take a sustained period of time. And, in the meantime, further falls could be ahead even for high-quality businesses that face difficult operating conditions. However, in the coming years, stocks that are experiencing major falls and high volatility today could become stunning recovery shares.
The stock market’s track record suggests that a long-term recovery after the recent market crash is very likely. It has experienced several major bear markets over recent decades, and has been able to post new record highs in the bull markets that have followed them. Therefore, while stocks that have fallen heavily may take some time to return to valuations that are similar to their historic averages, a reversion to the mean seems to be a likely long-term outcome.
Gold and Bitcoin
Of course, some investors may feel that recent trends which have pushed Bitcoin and the gold price higher will continue. As such, they may decide to avoid crashing stocks in favour of the precious metal and the cryptocurrency.
However, gold’s defensive appeal is a major reason why its price has soared to a record high. As the world economy returns to a higher growth rate, and investors become more optimistic about the outlook for undervalued businesses, they may shift their capital towards riskier assets such as stocks. This could limit gold’s capital returns from what is a very high current price level.
Likewise, buying Bitcoin instead of crashing stocks may not produce high returns. The virtual currency faces competition from other cryptocurrencies that may cause investor demand to moderate. Since its price is based solely on demand and supply due to its lack of fundamentals, this may lead to a disappointing performance compared to the stock market in the coming years.
Making a million
Making a million from crashing stocks is a realistic prospect for many investors over the long term. Indexes such as the FTSE 100 and S&P 500 have produced annualised total returns of at least 8% since their inceptions. Assuming a similar rate of return on a monthly investment of $750 would produce a seven-figure portfolio within 30 years.
However, by purchasing cheap stocks after the market crash, you could achieve a higher rate of return as the market recovers. This may allow you to obtain a seven-figure portfolio at an even faster pace.
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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.