Buying cheap stocks today may not yield high returns for investors in the short run due to the risks faced by the stock market. Coronavirus lockdowns put in place across the world economy may lead to severe declines in global GDP that cause investor sentiment to be highly volatile over the coming months.
However, with economic growth likely to return in the long term, now could be the right time to buy a selection of high-quality businesses while they offer wide margins of safety. This strategy could produce high returns that boost your financial prospects over the next decade.
Long-term recovery
The world economy may experience severe disruption in the short run, but it is likely to return to growth in the coming years. Policymakers have enacted major stimulus programs that are likely to offer a significant amount of support to the global economy. For example, the US has reduced interest rates to zero and enacted an 'unlimited' quantitative easing program. These measures could make the process of returning to positive growth much quicker for the world economy.
Furthermore, the track record of global GDP growth suggests that a period of decline is unlikely to last over a sustained time period. Previous recessions have always given way to growth. Although the current economic crisis could be relatively severe, corporate profitability and cheap stocks are very likely to recover over the long run as GDP growth returns to a positive figure.
Holding period
Despite the prospect of an improving long-term economic outlook, investors should not expect to generate high returns on their holdings over the short run. Numerous short-term risks remain in place. They include a possible second wave of coronavirus, inflationary pressure and many other potential challenges that could lead to poor performance from the stock market.
Therefore, it is crucial to provide your portfolio with sufficient time to overcome short-term threats and deliver on its growth potential. Through buying and holding cheap stocks for a period of ten years, you could increase your chances of benefitting from a likely stock market recovery that produces high returns for your portfolio.
Buying cheap stocks
Of course, investors should not only focus on price when purchasing stocks. It is also crucial to consider other factors such as their financial strength, track record during difficult economic periods, and the presence of an economic moat. Assessing a company's quality may require additional analysis and effort on the part of the investor, but it can help to identify which cheap stocks are the most attractive opportunities over the long run.
Buying a selection of cheap stocks and holding them for the long term has historically been a sound strategy to generate high returns. Although a recovery may not seem likely at the present time, the stock market has always returned to growth after its downturns. Investors who make purchases while valuations are low have often been among those who make the most attractive returns in the subsequent bull markets.
