Investing money in cheap UK shares after the market crash could prove to be a very profitable move. The stock market’s past performance is relatively sound. Indexes such as the FTSE 100 have produced annualised gains in recent decades of around 8% per annum. This is significantly higher than other mainstream assets.
However, in the short run, the stock market could experience a second market crash. High volatility may mean that investors experience paper losses. As such, holding on to stocks for the long term is likely to be key to unlocking their growth potential.
Short-term risks to UK shares
Investor sentiment towards UK shares has improved significantly since earlier this year. The stock market has made strong gains, but there are still a number of companies that trade on low valuations.
In the coming months, those valuations could realistically come under substantial pressure. There are a variety of risks that could negatively impact on company valuations. They include Brexit, coronavirus, and political uncertainty in the US. Even if those risks prove to be less impactful than many people expect, their presence may cause investors to become more risk averse.
Therefore, new investors who are expecting to make quick gains from UK shares may be left disappointed. There’s a very real threat of losing money in the short run. As such, adopting a long-term outlook could be crucial in generating high returns from the stock market.
Long-term risk/reward opportunities
The track record of UK shares shows they can outperform other mainstream assets over the long run. This is likely to be the case in the coming years, since the FTSE 100 and FTSE 250 have always risen to new record highs following their various bear markets over the years. Meanwhile, high property prices and low interest rates suggest buy-to-let investments, cash and bonds may struggle in the coming years.
Of course, not all British stocks will take part in the long-term recovery. Some may struggle to survive an economic shock that could prove to be greater than anything seen for many years. This means it’s imperative to build a diverse portfolio of stocks that operate in different sectors and geographies. This may help to protect your capital through reducing your reliance on a small number of businesses, some of which may experience poor trading conditions.
As well as buying a range of companies, purchasing high-quality UK shares could be a sound move. They’re likely to have solid balance sheets and a competitive advantage over their peers that helps them in delivering improving profitability.
Such companies may not be among the cheapest stocks around at present. However, they may be worth paying a premium for, since their long-term growth potential after the market crash may be higher than their sector peers.
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.