Although some stocks have rebounded from the 2020 market crash, there are still a number of cheap shares available to buy. They may experience short-term uncertainty, but have the potential to produce impressive returns in the long run as the economy recovers.
Warren Buffett has previously purchased cheap stocks to benefit from their capital return potential. Through following his lead, you could improve your chances of making a million in the coming years.
Buying cheap stocks after a market crash
Many investors may naturally be cautious about the prospect of buying cheap stocks after a market crash. After all, the uncertain global economic outlook means there is a very real threat that their prices will move lower in the coming months.
However, undervalued stocks have historically been a sound investment. They enable investors to buy companies at prices that are, in many cases, significantly lower than their intrinsic values. As the economy's outlook gradually improves, and investor sentiment does likewise, bargain shares are likely to have greater scope to register large capital gains than fairly valued businesses.
Therefore, the market crash has created numerous buying opportunities for investors. Previous bear markets have always been followed by bull markets, which is likely to be the case following the stock market's recent decline.
Risk management
Of course, not every cheap stock will recover after the market crash. Some industries and businesses may struggle to compete in what could prove to be a very different post-coronavirus economy. For example, retailers that lack an online presence may struggle to compete with e-commerce rivals, while energy companies may need to reinvest more heavily in greener alternatives to fossil fuels.
As such, it could be a shrewd move to build a diverse portfolio of undervalued stocks. Through having exposure to a variety of sectors and geographies, you can reduce your reliance on one particular industry or region. Given the uncertain economic environment facing many companies, this could prove to be a logical step for all investors to take.
Making a million
Even though buying cheap stocks after a market crash could improve your chances of making a million, it is unlikely to be a quick process. Even Warren Buffett took many years to build his wealth through adopting a similar strategy.
However, by giving your holdings the time they require to implement revised strategies and for investor sentiment to improve, it is possible to make a million. For example, the stock market has produced annualised total returns of around 8% over recent decades. By investing $500 per month over a 35-year time period, you could generate a seven-figure portfolio through earning the market return.
By investing in cheap stocks after the market crash, you may be able to obtain an even higher rate of return, thereby making a seven-figure portfolio a more realistic aim over the long run.
