The stock market crash has caused many investors to become more risk averse when it comes to buying UK shares. This is a logical response to what was one of the fastest and most severe declines in the recent history of indexes such as the FTSE 100.
However, today’s low valuations could mean there are buying opportunities on a long-term timescale. The current bull market may still be in its infancy. Similarly, many British shares trade at cheap prices that could lead to impressive capital returns over the coming years.
As such, I feel now could be the right time to drip-feed money into cheap stocks in a tax-efficient account such as an ISA.
Cheap UK shares after the stock market crash
The stock market crash has been replaced by a bull market after the recent equity market rebound. However, indexes such as the FTSE 100 and FTSE 250 continue to trade significantly below their prices from the start of the year. For example, the FTSE 100 is currently 23% down year-to-date.
Within the stock market, there may be a number of cheap UK shares available to buy today. Sectors such as banking, energy and travel continue to be unpopular with investors. Why? It is due to their challenging near-term outlooks. Yet in many cases, companies operating within those industries have solid financial positions. And I think they could respond positively to improving economic conditions over the long term.
Therefore, buying cheap UK shares after the stock market crash could be a logical strategy. It may enable an investor to purchase high-quality companies at low prices ahead of a potential recovery as the bull market gains ground over the long run.
Drip-feeding money into cheap UK shares
Of course, there could be a further stock market crash in the coming months. Risks such as Brexit and the US election may weigh on investor sentiment in the short run. Therefore, it may be prudent to drip-feed money into FTSE 100 and FTSE 250 shares, as opposed to investing a lump sum.
Buying smaller amounts of cheap UK shares regularly may mean that an investor can access even lower prices should there be further market volatility ahead. It may also help to overcome the psychological challenges of buying shares in an uncertain economic period. In other words, declining stock prices may be viewed as an opportunity to regularly purchase more shares. That is instead of it being a reason to worry about paper losses on a large investment.
Clearly, the stock market crash has caused ISA investors to experience paper losses this year. However, the track records of the FTSE 100 and FTSE 250 suggest that a sustained bull market and a recovery over the long run are likely. Investing through a tax-efficient account such as an ISA on a regular basis could be a means to capitalise on it.
The post Stock market crash: I’d drip-feed money into cheap UK shares in an ISA for the new bull market 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