The stock market crash has caused a large number of UK shares to trade at low prices. While some of them may never recover from their current low valuations, others could offer long-term recovery potential.
Through buying a diverse range of high-quality businesses, an investor like me could generate market-beating returns in the long run. I may even be able to build a portfolio valued at over a million as the market experiences a likely recovery from this year’s decline over the coming years.
Identifying must-own UK shares after the stock market crash
The threat of a second stock market crash means that investors may wish to focus on UK shares that have solid financial positions. This means that they have a higher chance of surviving what could prove to be a tough economic period that may last for a prolonged period of time.
As such, checking a company’s balance sheet may be a good starting point for any ISA investor like me. It provides guidance on the company’s debt levels, cash position and how solid its financial standing could be if sales decline due to a weak economic outlook. Similarly, analysing a company’s ability to service its interest payments via its interest coverage ratio could provide guidance as to how easily it can withstand a period of weaker financial performance.
Understanding the prospects for FTSE 100 and FTSE 250 shares
The stock market crash means that the prospects for many UK shares have changed significantly in recent months. While it is difficult to know how FTSE 100 and FTSE 250 shares will perform in the near term, some characteristics may provide guidance as to the chances of them being able to deliver a successful recovery.
For example, businesses with dominant market positions may find that they are less impacted by a weak economic period in the long run than their peers. Similarly, companies with strong brand loyalty, low costs relative to competitors and more flexible business models that can become more efficient at a fast pace could deliver stronger financial performances.
Buying such companies after the stock market crash may seem like a risky move. However, understanding business models could lead to less risk and higher long-term returns.
Making a million
The task of making a million may now be easier after the stock market crash. Many UK shares have wide margins of safety that could lead to higher returns than those reported by the FTSE 100 and FTSE 250 in the past.
Even if an investor attains only the same 8% annual return that the FTSE 100 has managed in its 36-year history, a £100,000 investment could be worth seven figures within 30 years. Investing money while share prices are low may reduce that amount of time and lead to greater long-term prosperity for ISA investors.
The post Stock market crash: how I’d identify must-own UK shares to buy in an ISA to make me a million 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