After the sharp rally in global stocks that took place in the aftermath of the March sell-off, many shares appear to be pulling back on recent gains. On top of this, gloomy economic data paints a less than favourable picture for the world economy, which may continue to take its toll on equities. So, is now really a good time to buy cheap UK shares in order to build wealth over the long term?
Warren Buffett’s advice
Despite rising US-China tensions, a weak economic outlook and the prospect of a second wave of infections, I think it could truly be an ideal time to invest in the stock market. As absurd as that may sound, investing during uncertain conditions can often lead to attractive returns down the line.
This notion is encapsulated by Warren Buffett’s advice to investors — be greedy when others are fearful. The investing genius has a reputation for piling cash into the stock market when others are running scared. His reasoning is simple, it enables him to buy shares in quality businesses while they’re cheap. As a result of his long-term strategy and calm temperament regardless of the prevailing market conditions, Buffett has made billions.
As such, I’d still buy cheap shares in quality companies today. Whether they rocket or plummet in the short term is largely irrelevant. Why? Because over the long term, the market has always risen as economic conditions improve.
Cheap UK shares
When on the outlook for the right companies to invest in, I would avoid buying shares simply because they’re cheap. This can be a fatal mistake, especially if the company’s share price has much further to fall. To eliminate the chances of this happening, it’s important to focus on the quality of the underlying business.
To do this, I’d recommend keeping an eye out for companies displaying business resilience despite the unfavourable trading conditions. More often than not, such companies tend to generate strong cash flows and sell goods and services that are valued by consumers regardless of economic circumstances. This means that they’re better positioned to ride out the temporary market downswings.
Make a million
Once you’ve bought a handful of diversified shares in good-quality companies, it’s time to let the wonders of compounding returns take over. To illustrate, let’s say you achieved an annual return of 8% on a monthly investment of £500. After 35 years, your pot would be worth £1,078,202!
With that in mind, I’d follow Warren Buffett’s advice and load up on shares while they’re still cheap. You never know, they may not stay cheap for much longer. In any case, if they fall further and the stock market crashes again, I’d see it as another opportunity to buy at a discount and hold for the long term.