Buying UK shares after the recent stock market crash is a tough task. A number of risks face investors that could derail the performance of the stock market in the short run.
However, by adopting a long-term view and focusing on high-quality companies, you could benefit from a likely recovery. Over time, this may help you to build a surprisingly large portfolio. And even help you make a million.
While buying UK shares after a market crash can lead to high returns in the long run, investors should manage their expectations due to the risks that are present. In other words, things may get worse before they improve.
Investor sentiment could be negatively impacted in the coming months by risks, such as Brexit and the coronavirus pandemic. This may mean your portfolio experiences paper losses, which can cause a degree of worry and frustration for any investor.
However, over the long run, the stock market offers excellent recovery prospects. Indexes such as the FTSE 100 and FTSE 250 have strong track records of recoveries. And, history suggests that buying undervalued stocks after a market crash is a sound means of benefitting from the stock market’s long-term growth potential.
Therefore, while expectations of a quick return to growth may be overly-optimistic, investors who buy cheap UK shares on a long-term view could build a surprisingly large portfolio in the coming years.
The potential for a second market crash and a weak economic outlook means buying UK shares with solid finances is more important than ever. Only the strongest businesses in a sector may survive the short run. They may also be able to extend their position to increase market share to maximise profitability as a recovery takes hold.
Through analysing company accounts, it’s possible to build a picture of the financial strength of a business. For example, a company with low debt, access to large amounts of liquidity, and resilient cash flow, may fare better and be viewed as more attractive by investors than a highly-indebted business with a weak cash flow.
Ignoring market noise after a market crash
Following a market crash, investor opinion is usually split on what will happen next. Some investors take a bullish stance, while others take a bearish one. The fact is, accurately predicting how UK shares will perform in the coming weeks and months is exceptionally difficult. If not impossible.
Therefore, it may be a good idea to ignore market ‘noise’ about how the stock market will fare in the coming months. Instead, buy high-quality businesses for the long term when they trade at low prices.
This plan could improve your portfolio’s performance in the coming years and boost your chances of making a million.
The post Stock market crash: I’d follow these 3 steps when buying cheap UK shares to make a million appeared first on The Motley Fool UK.
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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