Following the stock market crash, many UK shares are now trading on relatively low valuations. Although there is the potential for them to move lower in the coming months due to ongoing coronavirus risks, over the long term, they have the potential to experience a strong recovery.
Therefore, buying them now could prove to be a sound move. It may enable you to build a surprisingly large nest egg that may even be worth over £1m in the coming years.
The recovery potential for cheap UK shares
Buying cheap UK shares after a stock market crash is never an easy task for any investor. Your gut instinct is to sell stocks when they have fallen heavily and their prospects are challenging due to a weak economic outlook.
However, history shows that acting in the exact opposite manner can be a shrewd move. Indexes such as the FTSE 100 and FTSE 250 have long histories of experiencing periods of growth and decline. So far, neither have ever lasted in perpetuity. Therefore, investors who can buy when stock prices are low can access cheap valuations that are very likely to rise as the world economy’s growth rate and investor sentiment improve.
Stock market crash potential
Certainly, there is the potential for another stock market crash that could cause the valuations of UK shares to decline yet further. However, above all else, this year has shown that many economic downturns and stock market declines cannot be accurately predicted ahead of time.
Often, they start as potential threats to investors that quickly become major risks to economic growth. However, on other occasions they have been unforeseen events that quickly impact negatively on investor sentiment and stock prices.
Therefore, waiting for a more settled economic environment may mean that you fail to capitalise on low valuations among UK shares at the present time. With heightened risk often come more attractive valuations that can catalyse the portfolios of long-term investors as indexes such as the FTSE 100 and FTSE 250 recover.
Reducing risk
Of course, it is important to reduce risk when buying UK shares. Otherwise, your portfolio returns could be decimated by economic woes.
As such, diversifying across a wide range of shares is a prudent step for all investors to take. It reduces your reliance on a small number of businesses for your overall returns. Similarly, selecting high-quality businesses may lessen the impact of an economic downturn on your portfolio’s performance. It may also mean that you have a higher chance of taking part in a likely economic recovery.
Clearly, UK shares are riskier investments than other assets such as cash and bonds. However, they offer significantly greater return prospects over the long run. Buying them today while they are cheap could be a sound means of improving your chances to make a million.