Buying cheap UK shares after the 2020 stock market crash might not be a profitable move in the short run. After all, the world economy faces a hugely challenging period that may even produce further difficulties for indexes such as the FTSE 100 and FTSE 250.
However, the existence of such risks could produce buying opportunities for long-term investors. Undervalued shares have historically offered sound recovery prospects, with a return to stronger investor sentiment and positive GDP growth likely.
As such, now may be the right time to avoid purchasing popular assets, such as gold and Bitcoin, in favour of cheap FTSE 100 and FTSE 250 shares.
Buying cheap UK shares after the 2020 stock market crash
Most investors are bound to feel cautious about buying cheap UK shares after the 2020 stock market crash. After all, sentiment remains weak. There could even be a further downturn over the coming months that leads to paper losses for investors.
Due to this, the appeal of more popular assets, such as gold and Bitcoin, may rise. Gold’s defensive status and Bitcoin’s perceived lower correlation with the world economy may mean they even outperform the FTSE 100 and FTSE 250 in the short run.
However, a strategy of buying undervalued British shares after a major market decline has historically been successful. Downturns, such as the 1987 crash, the dot com bubble, and the global financial crisis, left many investors avoiding the stock market.
However, over time, it delivered a sharp recovery that led to high returns for many investors who purchased a diverse portfolio of cheap UK shares.
Buying unpopular assets
Of course, buying cheap UK shares is a difficult task. Even if an investor can see that a basket of FTSE 100 and FTSE 250 shares offers long-term growth potential, the prospect of near-term losses may initally dissuade them from going ahead with a purchase.
However, paper losses are unrealised until they’re sold. Therefore, buying high-quality companies that can survive short-term challenges, and benefit from a long-term recovery, could be a logical approach for an investor. They may trade in negative territory for many months.
But, over a period of many years, history suggests the stock market is very likely to produce a recovery.
Avoiding Bitcoin and gold
Meanwhile, there is certainly no guarantee that gold and Bitcoin will continue to outperform cheap UK shares. Gold’s price rise in 2020 may fully factor in changes, such as low interest rates and a period of economic weakness. Similarly, Bitcoin’s lack of fundamentals mean it’s difficult to accurately value the virtual currency.
As such, a portfolio of UK stocks could offer a more reliable investment option. Over the long run, they could recover from the 2020 stock market crash. In doing so, they may well produce impressive returns.
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.