While some shares have fully recovered from the 2020 market crash, many others continue to trade at relatively low levels. As such, there are still likely to be buying opportunities for long-term investors who are seeking to grow the size of their portfolio.
Through purchasing undervalued shares now, you could benefit from their long-term recovery potential as the prospects for the world economy improve. This may lead to market-beating returns that improve your chances of making a million.
Low valuations after the market crash
Numerous stocks continue to trade at low prices after the market crash. In fact, vast swathes of the stock market are currently trading significantly lower year-to-date. Their uncertain financial prospects are causing investor sentiment to remain weak. For example, commodity-related stocks, banks, and many support services companies currently trade on valuations that haven’t been seen since the last major global recession in 2008/09.
Buying stocks at low prices has historically been a sound means to generate high returns in the long run. As with any asset, a lower price provides greater scope for capital growth. It also means there may be a wider margin of safety on offer.
In some cases, such as where a company has a solid financial position and long-term growth potential, a low valuation may not be merited. This could reduce overall risks for investors when such companies are purchased as part of a diverse portfolio of shares after the market crash.
While some sectors may currently seem unlikely to recover from the 2020 market crash, history suggests they will encounter improving operating conditions in the coming years. For example, at times it felt as though the world economy would never recover from the global financial crisis.
However, through the use of an accommodative monetary policy, global GDP growth gradually recovered. This allowed companies trading in a wide range of sectors to produce rising profitability, which catalysed their share prices.
Policymakers have already sought to stimulate economic growth through fiscal and monetary policy stimulus in many of the world’s major economies. So the long-term prospects for global growth could be relatively sound. As such, buying a range of cheap stocks now while other investors are bearish on their prospects may enable you to benefit from a likely recovery in the coming years.
Making a million
While the market crash may have temporarily derailed the performance of the stock market, its track record suggests it offers high return potential in the long run. For example, indexes such as the FTSE 100 and S&P 500 have produced high single-digit annual returns over recent decades.
Assuming an 8% return on a £500 monthly investment, you could obtain a seven-figure portfolio within 35 years. However, through buying undervalued shares now ahead of a likely global economic recovery, you may be able to generate even higher returns than those of the stock market.
This could improve your chances of making a million in the coming years.
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.