The recent market crash means that there are a number of cheap stocks available to buy in a variety of sectors. Certainly, their prices could move lower in the short run due to risks such as a weak global economic outlook and the potential for a second wave of coronavirus. However, over the long run they could deliver impressive returns that boost your retirement prospects.
As such, buying a diverse range of cheap shares today could be a sound move. They could offer significantly higher returns than other assets over the coming years.
Market crash
The recent market crash may have dissuaded some investors from buying cheap stocks. After all, it was one of the fastest declines in the stock market's history. There may even be further risks ahead, with the potential for a second crash later in the year should a spike in coronavirus cases take place.
However, declines in the stock market are not all that uncommon. For example, over recent decades investors have experienced other bear markets such as the global financial crisis and the tech bubble.
As such, temporary declines in stock prices are likely to occur fairly regularly over an investor's lifetime. While they can cause panic in the short run due to the paper losses they create, on a long-term view they provide buying opportunities that can positively impact on your portfolio's performance.
Buying cheap stocks
A stock market crash presents an opportunity to buy cheap stocks across a wide range of industries. Weak investor sentiment and challenging trading conditions over the short run can combine to cause high-quality businesses to offer wide margins of safety. Over time, such companies are likely to experience improving operating conditions, rising profitability and growing sentiment among investors. This can lead to rising stock prices and high returns for investors who bought while stock prices were low.
Of course, ensuring that you purchase attractive businesses is highly important at the present time. Some companies may struggle to survive a period of weak economic performance that causes disruption to their operating environment. Therefore, focusing your capital on financially-sound businesses with wide economic moats could be a sound move that lowers your risks and boosts your long-term returns.
Relative appeal
Since the stock market has always recovered from its bear markets and downturns to post new record highs, buying cheap stocks today is likely to produce long-term growth via a successful recovery.
Moreover, on a relative basis the stock market appears to have significant appeal. Other mainstream assets such as cash and bonds lack return potential due to low interest rates that may remain in place over the medium term to support an economic recovery. As a result, stocks may be the most attractive means of improving your portfolio's prospects and of increasing your chances of retiring early.
