Buying cheap stocks after the recent market crash may not be a priority for investors who are seeking to build a nest egg to help them retire early. After all, volatility continues to be high across the stock market. And a further downturn after the recent rebound cannot be ruled out.
However, the track record of the stock market shows that it is likely to return to a sustained bull market over the long run. Through buying a diverse range of shares now while they are cheap in many cases, you could generate higher returns than other assets. And that means you could improve your financial prospects for retirement.
Investing in cheap stocks today
A risky future means that there continue to be many cheap stocks available, despite the market’s recent rebound. History suggests that buying them now while they offer wide margins of safety, and holding them over the coming years, could be an effective means of obtaining impressive returns.
For example, looking back, major risks continued to exist in the aftermath of the global financial crisis. This caused many stocks to trade at low prices, with investor sentiment taking a substantial amount of time to improve. But what happened long term? An accommodative monetary policy gradually stimulated the world economy, the operating conditions facing businesses improved and their share prices recovered.
Although the same outcome cannot be guaranteed following the current economic crisis, the scale of fiscal and monetary policy stimulus in major economies suggests a long-term recovery is likely. After all, the economy has always returned to growth following even its most severe recessions. As such, while risks remain, now could be the right time to capitalise on weak investor sentiment through buying cheap stocks.
Appeal versus other mainstream assets
Buying cheap stocks may not produce higher returns than other assets in the short run due to an uncertain economic outlook. However, over the long run, assets such as cash and bonds may produce disappointing returns.
Low interest rates look set to stay in place for a sustained period. This could mean that fixed-income securities and cash fail to improve your spending power. That is especially so as the scale of monetary policy stimulus being implemented in major economies has the potential to cause a rise in global inflation in the coming years.
Other assets such as property may also be relatively risky. It is much more difficult to build a diverse property portfolio than it is within the stock market due to factors such as the cost of homes.
As such, from a risk/reward perspective, cheap stocks could prove to be a superior means of obtaining an attractive risk/reward ratio for the long term. They may catalyse your financial prospects and help to improve your chances of enjoying an early retirement.
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.