The 2020 market crash has caused a wide range of stocks to trade at cheap prices. This situation may persist in the short run due to risks such as coronavirus. However, over the long run a return to higher valuations seems likely, based on the stock market’s past performance.
Therefore, now could be the right time to buy a diverse range of shares while they offer wide margins of safety. Over time, they could boost an investor’s portfolio’s performance and improve their chances of making a million.
A recovery after the market crash
While some shares have recovered to 2019 levels after the 2020 market crash, many other companies continue to trade at historically cheap prices. This may be because threats such as coronavirus, Brexit and the US election are weighing on their financial prospects and causing investor sentiment to weaken.
However, the past performance of the stock market shows that a reversion to average long-term valuations is likely over the long run. In other words, stocks with valuations that are significantly below their previous long-term averages are unlikely to trade at such low prices for too long.
Therefore, investors who take advantage of the market crash through buying cheap stocks could benefit from their upward re-ratings over the long run. This may translate into capital returns that outperform the wider stock market’s growth rate in the coming years.
Economic growth prospects
Clearly, there is a risk of a second market crash later this year. However, investors who have a long-term outlook can take advantage of this potential threat, since they will have sufficient time to benefit from a subsequent recovery.
The world economy has always produced a turnaround after its periods of negative performance to post strong GDP growth over the long run. Therefore, in the coming years, it is likely to follow the same pattern. That is especially so given the scale of monetary policy stimulus that has so far been announced in major economies across the world. It has the potential to lift asset prices and push investors towards riskier assets in an era of low interest rates.
Making a million
Investing money in cheap stocks after the market crash could lead to higher returns than the wider stock market over the long run. However, even if an investor obtains ‘only’ a similar return to the stock market’s past annualised growth rate of around 8%, they could still make a million within 30 years through investing £750 per month.
As such, now could be the right time to start buying undervalued shares. Investing either a lump sum now, or more modest amounts on a regular basis, could allow an investor to obtain impressive returns as market valuations gradually improve and the prospects for the world economy strengthen.
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.