The 2020 market crash has caused a wide range of stocks to trade at cheap prices. This situation may persist in the short run due to risks such as coronavirus. However, over the long run a return to higher valuations seems likely based on the stock market’s past performance.
Therefore, now could be the right time to buy a diverse range of shares while they offer wide margins of safety. Over time, they could boost your portfolio’s performance and improve your chances of making a million.
A recovery after the market crash
While some shares have recovered to 2019 levels after the recent market crash, many other companies continue to trade at cheap prices. This may be because threats such as coronavirus, Brexit and the US election are weighing on their financial prospects and causing investor sentiment to weaken.
However, the past performance of the stock market shows that a reversion to average long-term valuations is likely over the long run. In other words, stocks with valuations that are significantly below their previous long-term averages are unlikely to trade at such low prices in perpetuity.
Therefore, investors who take advantage of the market crash through buying cheap stocks could benefit from their upward reratings over the long run. This may translate into capital returns that outperform the stock market’s growth rate in the coming years.
Economic growth prospects
Clearly, there is a risk of a second market crash later this year. However, investors who have a long-term outlook can take advantage of this potential threat, since they will have sufficient time to benefit from a subsequent recovery.
The world economy has always produced a turnaround after its periods of negative performance to post strong GDP growth over the long run. Therefore, in the coming years it is likely to follow the same pattern – especially with the scale of monetary policy stimulus that has so far been announced in major economies across the world. It has the potential to lift asset prices and push investors towards riskier assets in an era of low interest rates.
Making a million
Investing money in cheap stocks after the market crash could lead to higher returns than the wider stock market over the long run. However, even if you obtain a similar return to the stock market’s past annualised growth rate of around 8%, you could make a million within 30 years through investing $750 per month.
As such, now could be the right time to start buying undervalued shares. Investing either a lump sum now, or more modest amounts on a regular basis, could allow you to obtain impressive returns as market valuations gradually improve and the prospects for the world economy strengthen.
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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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