Why I’d buy cheap shares despite the threat of another stock market crash

Buying undervalued shares today could be a shrewd move for long-term investors despite the threat of a second market crash.

businessman sitting at desk with head in hands in front of computer screens with falling financial charts, asx recession

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A second market crash may or may not occur following the recent rebound in equity prices. As such, investors may wish to purchase cheap shares today while they offer good value for money in many cases, ahead of a likely long-term stock market recovery.

Of course, keeping some cash on hand in case more attractive buying opportunities come along could be a sound move. However, with many sectors appearing to offer wide margins of safety, investors may wish to invest a large proportion of their portfolio while their prices are temporarily low.

Predicting another market crash

Trying to predict when a market crash will occur is almost impossible. For example, at the present time the stock market faces numerous risks that could realistically weigh on the world economy’s prospects. However, at the same time it could be argued that many of those risks are already factored into share prices. Therefore, they may not necessarily cause a severe decline in stock prices should they come to fruition.

Investors may wish to take advantage of low prices while they are on offer. The past performance of the stock market suggests that its downturns do not last in perpetuity, and can quickly give way to sustained bull markets that offer high returns. This may mean that focusing your capital on stocks, rather than other assets, could be a shrewd move. It may not necessarily lead to high returns in the short run, but could produce relatively high capital growth in the coming years.

Cheap shares

While some sectors have rebounded following the recent market crash, other industries continue to be exceptionally unpopular among investors. For example, energy, leisure and retail stocks are trading significantly below their long-term averages in many cases. This suggests that they may offer wide margins of safety, and that investors are adopting a cautious stance regarding their prospects.

This could present a buying opportunity for long-term investors. Although there are clear risks ahead that could cause their stock prices to trade lower for a time, over the coming years a recovery from their current price levels seems likely.

Relative appeal

As mentioned, holding some cash in case of a market crash could be a sound move. However, holding too much of your capital in assets that offer low returns, such as bonds and cash, could be detrimental to your long-term financial prospects. Low interest rates and the potential for reduced spending power may mean that shares offer significantly greater return prospects – especially since they have wide margins of safety in many cases.

Therefore, despite the threat of another market decline, now could be the right time to buy a diverse range of cheap shares to maximise your potential to take part in a likely stock market recovery.

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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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