Buying cheap UK shares after a stock market crash could prove to be a very profitable strategy for long-term investors. Not only is there scope to buy high-quality businesses at low prices, the track record of the FTSE 100 and FTSE 250 suggest that a recovery is very likely.
Moreover, the returns available from other assets are likely to be very disappointing in the coming years. Therefore, buying undervalued UK stocks in an ISA today could be a means of improving your chances of making a million.
Cheap UK shares
The stock market crash means that many UK shares trade at low prices. Certainly, their financial prospects in 2020 and potentially over the next couple of years are now more challenging than they were previously. However, they are still the same businesses with the same long-term growth potential in many cases.
To state the obvious, buying them at lower prices is likely to be a better idea than buying them at higher prices. It enables an investor to generate higher capital returns over the long run. While it may mean there is a period of volatility, and even some paper losses along the way, many FTSE 100 and FTSE 250 companies have solid balance sheets and sound strategies through which to ultimately recover from the present economic downturn.
Recovery after a stock market crash
The recent stock market crash was faster than many previous downturns. However, the FTSE 100’s fall of 34% from its 2020 starting price to its March low was not among the largest of bear markets experienced since its inception in 1984.
More importantly, the stock market has always recovered following every one of its previous declines to post new record highs. Therefore, investors who are able to buy after a major downturn and before a sustained recovery has taken place may position their ISA portfolio for long-term growth. Although the process of recovery can take months, or even years in some cases, history suggests that is it a very likely outcome.
Relative appeal
The appeal of UK shares after the recent stock market crash appears to be significantly higher than for other mainstream assets. For example, low interest rates mean that the returns on cash and bonds are exceptionally low. Meanwhile, the high price of gold and the question of affordability may mean that the precious metal and buy-to-let properties struggle to keep pace with UK stocks in the coming years.
With the FTSE 100 and FTSE 250 having produced high-single-digit annual total returns since inception, investing £500 per month in a wide range of stocks over a 35-year period could lead to a £1m+ ISA portfolio. By investing in undervalued shares today, you may be able to obtain even higher returns and boost your portfolio’s prospects in the coming years.
