The stock market crash has left many UK shares trading at cheap prices. As such, there could be opportunities for long-term investors to generate impressive returns as indexes such as the FTSE 100 and FTSE 250 gradually recover.
While risks remain in place, investors who purchase a diverse range of high-quality businesses now could build a surprisingly large nest egg. They could even obtain market-beating returns that improve their chances of making a million.
Cheap UK shares after the market crash
The market crash has caused investor sentiment towards many UK shares to weaken significantly. Many industries face an uncertain outlook that has led to lower prices for their incumbents, as investors account for what could be disappointing financial performances in the coming months.
This could present a buying opportunity for long-term investors. In many cases, cheap UK stocks include businesses that have strong competitive positions, solid balance sheets and are likely to not only survive the short-term economic challenges ahead, but to prosper as a recovery takes hold.
Buying such companies may not necessarily lead to high returns in the short run – especially with the ongoing threat of a second market crash. But, over the long term, the track record of the economy suggests that they will experience improving operating conditions. Over time, this may lead to stronger financial performance and more bullish investor sentiment that lifts their valuations.
Beating the FTSE 100
Even after the market crash has been taken into account, the FTSE 100 has produced high-single-digit annual returns over its lifetime. Assuming an 8% annualised growth rate on an investment of £100,000 would produce a £1m portfolio in 30 years. Similarly, a regular investment of £750 per month would lead to the same portfolio valuation over a 30-year time period, assuming the same rate of growth.
However, investors may be able to obtain a higher rate of return than the wider stock market through buying undervalued shares. They may contain wide margins of safety that provide greater scope for capital growth. And for those businesses with solid finances, they may be able to strengthen their market positions as weaker competitors struggle to survive a period of weak economic growth. This may widen their economic moat and lead to higher profit growth in the coming years.
Of course, buying UK shares after the market crash is a tough prospect for even the most experienced investors. Risks of a second downturn are likely to persist for many months. However, history shows that it is at these moments when the best buying opportunities generally present themselves. Therefore, investors who are seeking to build a large portfolio over time, and potentially make a million, may increase their chances of doing so by purchasing bargain UK shares today.
The post Stock market crash: here’s how I’d make a million by investing in bargain UK shares today appeared first on The Motley Fool UK.
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Motley Fool UK 2020