Buying cheap UK shares after the stock market crash may not seem to be a sound means of planning for retirement. After all, many FTSE 100 and FTSE 250 companies have declined heavily in value since the start of the year.
However, their low prices could present buying opportunities. Their recovery potential could mean they provide a sound means of building a retirement nest egg for an investor aged 50, or for those who have a long time horizon.
Recovering after a stock market crash
The stock market crash has left many UK shares trading at low prices levels. They may persist in the short run, due to ongoing risks such as Brexit and the coronavirus pandemic. But the long-term prospects for indexes such as the FTSE 100 and FTSE 250 could be relatively positive. Both indexes have produced high single-digit annual total returns since inception, despite experiencing multiple setbacks in that time.
In fact, they’ve always recovered from even the very worst market declines. While this year’s market downturn took place at a fast pace, it ultimately hasn’t been any more severe than other bear markets. For example, the global financial crisis wiped over 50% from the FTSE 100’s price level. By comparison, the index declined by around a third in the first quarter of 2020.
Certainly, there are risks in place that could cause a second stock market crash in the coming months. However, the key takeaway for investors could be that the stock market is likely to recover from its current price level. As such, buying UK shares today while they offer wide margins of safety could prove to be a profitable long-term move.
A long time horizon
As mentioned, a stock market crash cannot be ruled out in the short run. However, long-term investors are likely to have sufficient time available for their portfolios to recover. Hopefully before they need to access their capital to obtain a passive income.
As such, an investor aged 50 is likely to have sufficient time for their portfolio of FTSE 100 and FTSE 250 shares to recover from their current low prices before they reach retirement age. In doing so, today’s cheap UK shares may be able to offer market-beating returns due to them offering good value for money. In fact, a wide range of stocks appear to have the financial means to overcome short-term risks. And then to benefit from a long-term recovery.
Therefore, while it’s natural for any investor to feel more cautious after the stock market crash, now could prove to be an excellent long-term buying opportunity. It may provide an investor with the chance to buy high-quality businesses for less than they’re worth. This may result in a larger portfolio that allows an investor to retire in comfort.
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.