Buying cheap shares today ahead of a potential long-term stock market recovery may not seem to be a sound means of making a million. After all, the recent rebound in stock prices could be curtailed in the short term by risks such as a rise in coronavirus cases.
However, the past performance of stock market indices suggests they will record new all-time highs in the coming years. Therefore, at a time when other mainstream assets offer low prospective returns, now could be an opportune time to build a portfolio of cheap shares to increase your chances of making a million.
A record of stock market recovery
The past performance of share prices suggests that a stock market recovery is highly likely in the long run. Previous bear markets have been extremely painful for many investors and, in some cases, have lasted for many months, and even years. During them, the chances of a recovery, and a profitable future for investors, seemed slim. However, indexes such as the S&P 500 and FTSE 100 have always recorded a return to growth that pushes them to increasingly high levels.
At present, a recovery may seem unlikely. In fact, some investors may feel that stock prices have moved to excessively high levels following the recent rebound. After all, the world economy is likely to experience a period of weaker growth in the coming months.
However, by investing today when shares are cheap in some cases, you could benefit from a likely return to a sustained bull market that may catalyse your portfolio’s returns.
A margin of safety
Of course, some investors may feel that a better idea is to wait for a stock market recovery to take hold before buying stocks. They may wish to await more benign operating conditions across many sectors, and could focus their capital on lower-risk assets, such as bonds and cash, that promise a higher chance of a return of capital.
The problem with that plan is it can mean stock prices move higher and become less attractive, with the scope for making a profit thereby deteriorating. For example, at present, some industries appear to lack wide margins of safety due to the recent market rebound. If an investor waits for other sectors to also rise in value, they may be unable to obtain attractive price levels and sufficiently wide margins of safety to produce high total returns in the long run.
Making a million
Therefore, buying cheap shares today and holding them for the long run may be a better idea than opting for lower-risk assets.
Building a portfolio of undervalued stocks could enable you to benefit from low prices during a period of difficulty for the world economy. They have the potential to move significantly higher as a stock market recovery takes hold. Over time, they could improve your chances of making a million.