The recent stock market crash has caused a number of UK shares to trade on low valuations. While they may not benefit from a sustained recovery in the short run, due to risks such as Brexit and a second wave of coronavirus, buying cheap UK stocks today could lead to impressive returns in the long run.
By investing £10k, or any other amount, in a diverse range of strong companies that operate in industries with long-term growth potential, your ISA could profit from the stock market’s recovery potential.
Diversification after a market crash
Diversifying your portfolio across a range of UK shares is always important, but it’s arguably even more crucial following the market crash. Many companies face difficult operating conditions that may persist in the coming months. They may also need to adapt their business models to changing consumer trends that could have been quickened by lockdown measures.
Fortunately for investors, building a diverse portfolio is less expensive than ever. Online sharedealing means UK shares can be purchased with very low commission charges. Meanwhile, tax-efficient accounts such as Stocks and Shares ISAs have minimal management fees.
Although diversifying may not be an especially exciting prospect, it can help to reduce risk ahead of a potential second market crash. It’s also arguably too soon to know which sectors will produce strong recoveries in the coming years. Diversification increases the likelihood that you’ll avoid overexposure to slower-growth industries, and invest in more attractive industries.
Assessing business strength after a market crash may help to improve your ISA’s return prospects, and also minimise its risks. For example, buying a range of companies that all have low debt, strong cash flow, and that operate in sectors with reliable demand for their products, is likely to be a more logical approach than buying businesses with weak financial positions and that lack a competitive advantage.
Therefore, analysing company annual reports and understanding the size of their economic moat could be a shrewd move. It may enable you to survive a potential further downturn. It wll also allow you to benefit, to a greater extent, from a likely stock market recovery in the coming years.
Of course, an uncertain outlook for the stock market means holding some cash back in the short term could be a logical approach. It may enable you to benefit from a second market crash in 2020, through accessing lower valuations.
As such, investing gradually, rather than in a lump sum, could be a sound move. Clearly, holding cash for the long run is unlikely to lead to impressive returns. However, having some cash on hand can provide peace of mind in an uncertain period for the economy. It’ll also allow you the scope to buy high-quality UK shares at even cheaper prices in the coming months.
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.