Buying cheap stocks today may not be an appealing idea to many investors. After all, the prospects for the global economy continue to be very uncertain, and some companies may struggle to adapt to changing consumer tastes in a post-coronavirus world.
However, low valuations within some sectors mean that now could be the right time to buy a diverse range of shares. They could outperform other mainstream assets and allow you to generate impressive returns.
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Cheap stocks that account for future risks
While some cheap stocks are priced at low levels for good reason, others appear to be suffering from weak investor sentiment towards their wider industry and stock market. For example, some companies have solid balance sheets, strong cash flow and strategies that could produce improving financial performances in the coming years. Yet they have valuations that, in some cases, were last seen during the global financial crisis.
Furthermore, their valuations suggest that investors have factored in many of the risks faced at the present time. For example, risks such as the ongoing threat of containment measures caused by coronavirus and political uncertainty caused by Brexit appear to be accounted for in the low valuations of many stocks. This could mean that now represents a buying opportunity, since they appear to offer wide margins of safety that may lead to impressive capital returns in the long run.
A lack of other opportunities
Buying cheap stocks now may also be a good move due to the lack of other opportunities for investors. Low interest rates mean that bonds and cash are unlikely to produce strong positive after-inflation returns over the medium term. Similarly, high house prices mean that investing in property may be unable to provide the level of returns than many investors currently desire.
Therefore, buying a diverse range of stocks today could be a means of generating relatively high returns over the long run. The past performance of the stock market shows that it has always recorded new record highs after its bear markets and downturns. Buying shares while they are undervalued may enable you to benefit from its likely recovery following the market crash.
The next market crash
Of course, nobody knows when the next market crash will occur. It could take place imminently, or may be many years away. After all, many of the key risks facing investors have been present for a number of months. Therefore, cheap stocks today may fail to move even lower in price, thereby making them an attractive investment opportunity at the present time.
Certainly, the stock market will not make uninterrupted gains. However, with many stocks currently appearing to offer wide margins of safety, now could be the right time to buy a range of them and hold them for the long run.
