The 2020 stock market crash has left investors with a great deal of choice when it comes to buying cheap UK shares. Industries such as financial services, retail, travel & leisure and many others face exceptional circumstances that have caused investors to demand wide margins of safety.
Through purchasing high-quality companies when they trade at low prices, an investor could generate impressive returns as the stock market recovers. Over time, this may allow them to produce a surprisingly large nest egg that improves their chances of retiring early.
The 2020 stock market crash
The 2020 stock market crash has left a wide range of FTSE 100 and FTSE 250 shares trading at low prices. It may be tempting for an investor to simply purchase a basket of cheap UK shares. But a more profitable move could be to select high-quality companies that offer margins of safety.
Some companies may deserve their low share prices at the present time. For example, they may not have sufficient financial strength to overcome the challenging conditions faced by the sector in which they operate. Moreover, they may not have an adaptable business model or the right strategy to benefit from a likely economic recovery.
As such, investors may wish to remain selective in terms of the shares they buy after the stock market crash. For example, this may mean they only purchase companies with low debt/equity ratios. Or maybe those with large interest coverage ratios and the right strategies to adapt to a fast-changing global economic outlook.
A long-term bull market
The prospect of a long-term bull market may seem low after the 2020 stock market crash. Indexes such as the FTSE 100 and FTSE 250 have recently produced disappointing performances that may yet continue in the coming months.
However, their track records show they have always recovered from their lowest points to post new record highs. As such, a sustained bull market seems likely that could lead to rising valuations for today’s cheap UK shares.
Companies with solid financial positions and sound strategies may be more likely to benefit from a long-term economic recovery. They may even be able to improve upon their current market positions so they can produce greater sales and profitability. For example, they may be able to expand market share due to the performance of weaker rivals.
Certainly, other mainstream assets such as cash and bonds offer greater stability than cheap UK shares after the 2020 stock market crash.
However, with a number of high-quality businesses currently trading at low prices, investors who are selective about the cheap shares they buy today could survive the short-term economic challenges ahead. And that means they could generate market-beating returns in the long run.
Doing so could improve their chances of building a retirement nest egg that allows them to bring forward their retirement date.
The post Stock market crash 2020: buying cheap UK shares could help an investor to retire early appeared first on The Motley Fool UK.
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