Investing money in cheap UK shares could provide an investor with a surprisingly large portfolio in the long run.
Of course, risks such as Brexit and the coronavirus pandemic may hold back the prospects for FTSE 100 and FTSE 250 stocks in the short run.
However, by investing £10k, or any other amount, in a range of high-quality companies while they trade at low prices, an investor could benefit from a likely stock market recovery.
Buying high-quality cheap UK shares
The stock market crash means there are currently a wide range of cheap UK shares in a variety of sectors. However, some companies are likely to offer stronger prospects than others. For example, businesses with solid finances are likely to equate to less risk. Especially during what could be a large economic downturn that persists for a number of months. Similarly, companies with a clear competitive advantage may fare better than their peers as consumer confidence returns and operating conditions improve.
As such, an investor may wish to target high-quality companies that trade at low prices. This doesn’t mean simply purchasing a random selection of cheap UK shares available after the stock market crash. Instead, it entails finding strong businesses that can deliver impressive financial performances over the long run. Then buying them while they offer a wide margin of safety.
Diversifying after the stock market crash
The prospect of a second stock market crash may mean that some cheap UK shares experience severe difficulties over the short run. The future prospects of the economy are very unpredictable at present. Therefore, even if an investor finds high-quality companies at low prices, there’s always a risk that one or more of their holdings will produce poor returns.
As such, building a diverse portfolio of British shares when investing money is likely to be of greater importance now than it has been for many years. A diverse portfolio equates to less risk. It also means there’s a wider range of growth opportunities available. And that can lead to more impressive returns over the long run.
A long-term stock market recovery
The prospects of a stock market recovery may seem remote for many cheap UK shares. After all, there are likely to be more difficulties ahead due to an uncertain economic and political outlook.
However, the long-term performance of indexes such as the FTSE 100 and FTSE 250 suggests that a sustained bull market is very likely to occur over the coming years. It’s set to produce new record highs, as per previous long-term bull markets. Therefore, having a long-term horizon when buying undervalued British shares may provide an investor with a significant advantage.
It may enable them to capitalise on the stock market’s recovery potential and make significant capital returns from a diverse portfolio of cheap UK shares.
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.