The 2020 stock market crash was among the fastest downturns recorded in recent decades for UK shares. Since then, indexes such as the FTSE 100 and FTSE 250 have rebounded. However, many stocks continue to trade at cheap prices that indicate they could offer good value for money.
Through building a portfolio of high-quality businesses while they offer wide margins of safety, you could benefit from the stock market’s recovery potential. This may lead to high returns that improve your chances of making a million.
High-quality UK shares
It is tempting to simply buy the cheapest UK shares you can find after the stock market crash. However, this may not be the most effective means of benefiting from the recent downturn. It may be more logical to find the best companies and then pay a fair price for them.
For example, some stocks may be cheap for good reason. They may have weak balance sheets or business models that prove to be outdated as consumer trends change. Similarly, they may operate in industries that face difficult operating conditions for a prolonged period of time. Therefore, buying them may not produce impressive returns in the long run.
By contrast, purchasing strong companies that have sound finances and dominant market positions after the recent market crash could deliver more attractive returns. They may be better able to adapt to changing operating conditions, and could produce higher profitability that translates into a rising valuation. Although they may not necessarily be among the cheapest UK shares at the present time, they may be worthy of a higher valuation due to their lower risks and higher return prospects.
Recovery after a stock market crash
The speed of the 2020 market crash may dissuade some investors from buying UK shares. They may view the high volatility that is still present across the FTSE 100 and FTSE 250 as a reason to seek lower-risk assets that offer a higher chance of a return of capital.
However, the best times to buy shares have often been shortly after a severe decline for the stock market. For example, the FTSE 100 halved in the global financial crisis. It went on to more than double in the following years. Investors who purchased stocks while the economic outlook was bleak in 2009 are likely to have been handsomely rewarded.
It’s a similar story after other stock market declines. The histories of the FTSE 100 and FTSE 250 show that no stock market crash has ever lasted in perpetuity, and that a recovery has always been achieved. Therefore, buying high-quality companies that have turnaround potential while they offer wide margins of safety could be a profitable move. It may boost your portfolio’s performance in the coming years, and even improve your chances of making a million.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.