The stock market crash may have caused some investors to question whether UK shares can provide the means of making a million over the long run. After all, many stock prices continue to trade significantly below their pre-coronavirus levels.
However, the stock market has a strong track record of delivering recoveries after its downturns. Therefore, buying financially-sound businesses with wide economic moats at discounted prices could improve your chances of obtaining a seven-figure portfolio over the coming years.
Financial strength in a market crash
Companies with solid finances may be better able to survive a market crash. For example, they may have modest debt levels that do not put their financial situation under pressure should they experience a period of weaker sales and profitability.
Furthermore, companies with solid finances may be able to capitalise on the uncertain outlook for the world economy. Lockdown measures may have eased, along with concerns about coronavirus, but risks such as a second wave may persist over the coming months. This may lead to continued challenging trading conditions across many sectors that cause financial difficulties for some businesses.
Those companies with sound balance sheets and strong cash flow may be able to gain market share at the expense of their weaker peers. This may improve their long-term growth prospects and increase your chances of making a million.
A wide economic moat
Companies with wide economic moats may be better able to overcome a market crash to post rising profitability over the long run. An economic moat requires a subjective assessment, but is essentially a competitive advantage that one company has over its sector peers.
For example, a business may have lower costs than its rivals that allow it to generate higher profitability. Or it could enjoy a high degree of customer loyalty that provides it with greater pricing power than its peers.
A wider economic moat can also allow a company to command a higher valuation than many of its industry peers. Investor sentiment may be more positive when a business has a wide economic moat as it is seen as a relatively lower-risk opportunity compared to its sector peers.
Low stock market valuations
Although indices such as the FTSE 100 and FTSE 250 have rebounded sharply from the recent market crash, many of their members continue to trade on low valuations compared to their historic levels. This suggests that they offer wide margins of safety, which could lead to high returns in the long run.
Through buying stocks while they are cheap, it may be possible to benefit to a larger extent from the stock market’s likely long-term recovery. Over time, this can provide your portfolio with a significant boost that increases your chances of making a million over the coming years.
