Buying cheap stocks after a market crash is a challenging process for many investors. After all, stock prices can remain volatile for a sustained period of time after a market downturn. They may produce paper losses that can cause worry among investors.
However, the long-term track record of the stock market suggests that buying undervalued shares today and holding them for a decade is likely to produce high returns.
As such, avoiding popular assets such as gold and Bitcoin to purchase cheap stocks could be a shrewd move even while the stock market continues to be volatile.
Relative appeal
Buying cheap stocks may not produce higher returns than gold and Bitcoin in the short run. Gold, for example, may experience further capital growth due in part to its status as a store of wealth. Investor demand for the precious metal may increase if the global economic outlook weakens, and investors adopt an increasingly risk-averse stance regarding the assets they hold.
However, over the long run the return prospects for gold could be relatively disappointing. Investor sentiment is likely to improve, which could make riskier assets such as equities more attractive. And, with gold trading close to an all-time high after its gain since the start of 2020, it may lack capital return potential over the next decade.
Likewise, Bitcoin may be seen by some investors as a means of differentiating a portfolio. However, its long-term prospects are exceptionally difficult to predict due to its lack of fundamentals and dependence on investor sentiment to determine its price. With a limited size and potential regulatory challenges ahead, Bitcoin's risk/reward ratio may prove to be somewhat unattractive relative to undervalued stocks.
Buying cheap stocks
Purchasing cheap stocks and holding them for a long time period, such as ten years, has been a worthwhile means of generating high returns in the past. Bargain shares do not necessarily reflect the quality of a company, since investor sentiment can be weak for a variety of reasons.
For example, at the present time some stocks may be viewed by investors as unattractive simply because of the uncertain future facing the world economy. They may have solid balance sheets, sound strategies and wide economic moats that provide a high chance of surviving the global economic crisis, as well as generating improving profitability in the long run. However, because of weak investor sentiment towards the wider stock market, they offer low valuations.
Through buying high-quality companies while their stock prices are low, it is possible to capitalise on the stock market's recovery prospects. The stock market has always experienced a market rally after its downturns in the past, and is likely to experience a similar outcome following the current challenges facing the world economy.
Fiscal and monetary policy stimulus mean that stock prices could experience a sustained bull market, which means that now could be the right time to buy a diverse range of cheap stocks and hold them for the next decade.
