The stock market crash has caused a significant amount of stress and worry for investors. Even though there has been a rebound in recent months, the prospect of a second decline and an uncertain economic outlook means that buying cheap UK shares may not be an appealing idea to many investors.
However, the low valuations on offer across a wide range of sectors could make now the right time to buy a diverse selection of stocks. Over time, they have the potential to recover in many cases, which could boost the performance of your ISA.
Buying cheap UK shares after a market crash
While the idea of purchasing bargain UK shares after a market crash may not necessarily be appealing to many investors, it could be a profitable move. In many cases, high-quality companies are currently trading at prices that are significantly below their long-term averages. As such, it is possible to fulfil the first part of a ‘buy low’ and ‘sell high’ strategy that is favoured by many investors.
Of course, the challenge involved in this strategy is that for share prices to trade at low levels there must usually be a significant risk ahead. At the present time, there is uncertainty regarding the economy’s prospects, while a second wave of coronavirus cases could cause many consumers and businesses to rein-in their spending.
Despite this, many valuations on offer across the FTSE 100 and FTSE 250 have not yet fully recovered following the market crash. Therefore, a number of stocks appear to offer wide margins of safety that may factor in the risks facing the economy, and the stock market, over the coming months.
Recovery potential
While a recovery from the recent market crash is very likely over the long run, it remains unclear which sectors will partake in it. Consumer habits may have changed permanently following the recent lockdown, or they may gradually return to previous trends.
As such, it is arguably more important than ever for investors to build a diverse ISA portfolio that has exposure to a variety of industries and regions. This may not only reduce the risk of selecting sectors and geographies that deliver poor performance, it may also enable you to gain exposure to a wider range of fast-growing industries and countries over the coming years.
Even though some sectors may never fully recover after the market crash, a diverse portfolio of stocks is likely to return to growth. Indexes such as the FTSE 100 and FTSE 250 have long track records of recovery from even their very worst declines, with them producing annualised total returns that are in the high-single digits. With many UK shares currently trading at exceptionally low prices, you may be able to beat those historic returns to build a surprisingly large ISA portfolio in the long run.
