How you can reposition your portfolio to capitalise on the market crash
The recent market crash, which saw the FTSE 100 decline by as much as 9%, caught many investors by surprise. After all, stock markets across the globe have performed exceptionally well in previous years. This had created a buzz around investing which arguably hadn't been present since prior to the financial crisis.
Now that the FTSE 100 is trading well below its all-time high, it could be a good opportunity for long term investors to change the make-up of their portfolios. Here's a few ideas on how to do that in order to potentially generate higher returns in future.
Perhaps the most obvious point to make is that now could be a buying opportunity. Share prices are generally lower than they were a few weeks ago, and this could mean that they offer wider margins of safety. This could translate into lower downside risk as well as greater upside potential.
Certainly, share prices could experience a period of above-average volatility in the near term. A sharp correction in stock markets across the globe is likely to have awoken bullish investors to the fact that there are risks facing the world economy. This may mean that they adopt a more risk-off approach in future months, which could limit the growth potential on offer from shares in the short run.
However, shares still appear to offer the most favourable risk/reward opportunity among the major asset classes. Unlike bonds and cash, they are unlikely to be hard-hit by rising inflation, while superior tax advantages versus buy-to-let property mean that shares seem to be the obvious asset of choice right now.
A changing outlook
One area which may be of interest to long-term investors after the recent market crash is UK-focused stocks. They have been unpopular compared to their global peers in the last couple of years with Brexit uncertainty also meaning many investors have looked to international growth when apportioning their cash.
However, I believe Brexit talks are progressing better than many people expected and there could be further progress. If a transitionary period followed by a fair deal is agreed, companies operating in the UK may perform well. With their valuations being relatively low, they could offer significant capital growth potential. This may not be realised in the short run, but they could be top performers in the coming years.
So too could defensive dividend stocks. Inflation remains persistently high, and yet the Bank of England is still cautious about raising interest rates. Coupled with the prospects of investors being less bullish following the correction, this could mean that previously unloved defensive income stocks become increasingly in-demand in future. This situation may allow an investor to buy low and sell high in the long run.
As such, buying defensive income stocks that are focused on the UK could lead to a positive real-terms income return, as well as some protection against further turbulence in the financial markets.