Buying cheap stocks today may not yield high returns for investors in the short run due to the risks faced by the stock market. Lockdowns put in place across the world economy may lead to severe declines in global GDP. And that would cause investor sentiment to be highly volatile over the coming months.
However, with economic growth likely to return in the long term, now could be the right time to buy a selection of high-quality businesses while they offer wide margins of safety. This strategy could produce high returns that boost your financial prospects over the next decade.
The world economy may experience severe disruption in the short run, but it is likely to return to growth in the coming years. Policymakers have enacted major stimulus programmes likely to offer a significant amount of support to the global economy.
For example, the US has reduced interest rates to zero and introduced an ‘unlimited’ quantitative easing programme. These measures could make the process of returning to positive growth much quicker for the world economy.
Furthermore, the track record of global GDP growth suggests a period of decline is unlikely to last over a sustained time period. Previous recessions have always given way to growth. Although the current economic crisis could be relatively severe, corporate profitability and cheap stocks are very likely to recover over the long run as GDP growth returns to a positive figure.
Despite the prospect of an improving long-term economic outlook, investors shouldn’t expect to generate high returns on their holdings over the short run. Numerous short-term risks remain in place. They include a second wave of coronavirus, inflationary pressure, and many other potential challenges. These could lead to a poor performance from the stock market.
Therefore, it’s crucial to provide your portfolio with sufficient time to overcome short-term threats and deliver on its growth potential. Through buying and holding cheap stocks for 10 years, you could increase your chances of benefitting from a likely stock market recovery that produces high returns for your portfolio.
Buying cheap stocks
Of course, investors shouldn’t only focus on price when purchasing stocks. It’s also crucial to consider other factors, such as their financial strength, track record during difficult economic periods, and the presence of an economic moat. Assessing a company’s quality may require additional analysis and effort on the part of the investor. But it can help to identify which cheap stocks are the most attractive opportunities over the long run.
Buying a selection of cheap stocks and holding them for the long term has historically been a sound strategy to generate high returns. Although a recovery may seem unlikely at present, the stock market has always returned to growth after its downturns.
Investors who make purchases while valuations are low have often been among those who make the most attractive returns in the subsequent bull markets.
The post Investing in cheap stocks after the market crash can make you a fortune in the next 10 years appeared first on The Motley Fool UK.
- Stock market crash round 2 may be coming. Here's what I'm doing now!
- FTSE 100 crash: I’d start buying cheap stocks in an ISA today to get rich and retire early
- Lloyds’ share price has fallen below 30p. Here’s what I’m going to do now
- Stock market rebound: Could dirt-cheap Aston Martin shares help you get rich and retire early?
- I’d buy cheap FTSE 100 shares today despite the potential for another stock market crash
- Top shares for 2020
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020