The stock market crash has caused a number of high-quality businesses to trade at cheap prices. The past performance of the stock market suggests that they offer long-term recovery potential. Over time, this may mean that they significantly outperform other mainstream assets.
As such, now could be the right time to build a diverse portfolio of cheap shares. They could boost your financial prospects and help to bring your retirement date a step closer.
High-quality companies trading at cheap prices
While some shares are deservedly cheap after the market crash, others appear to be undervalued. For example, some companies with sound balance sheets and significant competitive advantages are trading at exceptionally low prices because of weak investor sentiment towards their sector.
Although they may face uncertain operating conditions and weak financial prospects in the short run, over the long term they have the potential to deliver improving profitability. Therefore, now could be an excellent opportunity to buy such companies while they appear to offer wide margins of safety. They could produce impressive capital returns that boosts the performance of your portfolio.
Recovery potential after a market crash
While some share prices have rebounded after the market crash, others continue to trade significantly down year-to-date. History suggests that, over time, the prospects for the wider stock market are relatively positive. After all, the stock market has always produced new record highs after its downturns. In doing so, the share prices of most companies have often made strong gains that produce high capital returns for investors.
Therefore, buying stocks today for their long-term turnaround potential could be a sound move. Risks such as Brexit, the United States election and coronavirus may hold back global stock prices in the short run. But the track record of equity markets suggests that the long-term prospects for stock prices is likely to very positive.
Relative return potential
While the market crash has caused paper losses for many investors this year, the long-term return prospects from shares are higher than other mainstream assets. For example, low interest rates mean that cash and bonds may struggle to offer impressive returns once inflation has been taken into account.
Meanwhile, property investing may offer less scope to obtain undervalued assets due to price rises in the global property market over the past decade. Therefore, on a relative basis, shares appear to offer a more favourable risk/reward investing opportunity.
Of course, shares may not necessarily produce impressive returns in the short run due to the ongoing threat of a second market crash. However, over the long run they have the potential to generate surprisingly high capital returns â€“ especially for those investors who buy and hold high-quality businesses while they are trading at cheap prices.
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Returns as of 6th October 2020
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 aÂ diverse range of insightsÂ makes us better investors. The Motley Fool has aÂ disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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