Buying the best bargain shares today may not deliver high returns in the short run. Risks such as coronavirus and political uncertainty in the US may contribute to further weak sentiment among investors that puts pressure on stock prices.
However, in the long run, today's undervalued stocks could deliver a strong recovery. The low prices of some high-quality businesses suggest that equities offer superior return potential than other assets. As such, now could be the right time to add attractive stocks to your portfolio.
High-quality stocks are cheap
Some of the best bargain shares may be those businesses that are priced at low levels due to weak investor sentiment towards the wider stock market, or towards the sector in which they operate.
For example, the retail sector may be facing a very difficult near-term outlook as a result of weak consumer sentiment. However, this does not mean that all retailers will produce poor results in the coming months. There may be some companies with wider economic moats that are able to outperform their peers.
Therefore, there may be opportunities to buy bargain shares due to weak investor sentiment towards a specific sector or the stock market in general. Over time, undervalued stocks that produce relatively impressive results can command higher valuations that lead to appealing investment returns.
The recovery potential of bargain shares
Bargain shares offer strong recovery potential over the long run. The past performance of the stock market shows that it has produced high single-digit annual returns over recent decades. It has also recovered from every previous bear market. As such, while the near-term prospects for many stocks are currently uncertain, a diverse portfolio of companies is likely to deliver impressive returns.
Historically, the best buying opportunities have often appeared when investor sentiment is weak. At such times, a larger number of companies often trade at prices that do not fully reflect their long-term growth potential. As such, now could be the right time to buy a selection of stocks ahead of a very likely recovery over the long run.
A lack of opportunities elsewhere
The prospect of buying bargain shares is made more appealing due to the lack of return potential available elsewhere. Assets such as cash and bonds are likely to offer very low returns over the medium term due to low interest rates. High house prices mean that property investment may be disappointing from a return perspective. Meanwhile, gold's high price may also mean that investors have factored in a tough period for the economy.
Therefore, building a portfolio of undervalued shares may prove to be a relatively profitable move. It may not lead to high returns in the short run. However, it has been a sound strategy over many years that could lead to an improvement in your financial situation.
