The recent market crash may have caused some investors to take a short-term view of UK shares. They may naturally be concerned about how stock prices will perform over a matter of weeks, rather than over a period of years, due to an uncertain economic outlook.
However, taking a long-term approach to buying FTSE 100 and FTSE 250 shares today could prove to be a sound move. It may allow you to use cheap stock prices to your advantage, and to benefit from a likely recovery for shares that produces higher returns than other mainstream assets.
As such, now may be the right time to buy a selection of high-quality stocks, and hold them for the next decade.
A long-term approach after the market crash
Although a second stock market crash may potentially be ahead, investors who can look beyond the short term may be handsomely rewarded over the coming years. Certainly, paper losses may be incurred as risks such as a second wave of coronavirus and Brexit weigh on investor sentiment. However, over the long run, the chances of a strong recovery from present stock prices seem to be very high.
As well as a solid track record of recovery that has produced high-single-digit returns for the FTSE 100 and FTSE 250 indexes since their inception, recent fiscal and monetary policy stimulus could boost the stock market’s recovery potential. Therefore, investors who can ignore short-term volatility and instead consider how their portfolio will appear in a decade’s time may be able to capitalise on cheap prices that are likely to be temporary in nature.
Relative performance of UK shares
Over the long run, a portfolio of UK shares is very likely to outperform other mainstream assets, despite the ongoing threat of a market crash. Although it may display greater volatility than other popular assets at times, the end result may be a larger portfolio valuation.
For example, cash is likely to offer modest after-inflation returns at best as a result of the prospect of a long period of low interest rates. Similarly, bond prices are relatively high at the present time due to a loose monetary policy. This may lead to disappointing returns for fixed-income investors. Meanwhile, tax changes to buy-to-let property and high house prices mean that long-term holders of UK shares may generate significantly higher returns.
Therefore, through buying cheap stocks today while there is the threat of a second market crash, you can outperform other options for your capital. As was the case in previous market downturns, high-quality businesses have historically not traded at bargain prices in perpetuity. Through buying them now, and having a patient approach that involves allowing them time to recover, you could build a surprisingly large portfolio that improves your financial prospects in the coming years.