A stock market crash presents an opportunity for investors to hoover up shares in companies trading on discounted valuations. When market sentiment deteriorates rapidly, many shares can be oversold and, thus, appear undervalued. So, if you’re intending to invest money in the stock market, today could be an ideal time to do so.
Investing money in the aftermath of a stock market crash
Since the major sell-off in March, global stocks have risen sharply. In fact, the American blue-chip index (the S&P 500) recently reached a new all-time high. That’s pretty staggering considering the bleak economic conditions and an ever-present threat of a second wave of coronavirus infections.
However, many UK shares haven’t enjoyed the same success as their American counterparts. To illustrate, the FTSE 100 index is still down by around 20% since the beginning of 2020. Rather than being put off by this, I think investors should see it as an opportunity. With countless British companies still trading on dirt-cheap valuations, now could be a fantastic time to buy shares in high-quality businesses.
With that in mind, I’d direct my attention towards searching for companies that are trading well below their average historic valuations. As well as offering a wide margin of safety, this indicates the company’s shares may be undervalued. Picking up such shares while they’re cheap often results in tidy returns further down the line. Especially when investor sentiment towards the company picks up again. This strategy is one of the ways in which investing genius Warren Buffett has made his millions over the years.
The path to getting rich and retiring early
Once you’ve invested your money in a handful of cheap UK shares, it’s time to sit back and hold for the long term. While short-term risks will inevitably continue to take their toll on equities, this shouldn’t be a concern for long-term investors. Why? Because having a long-term horizon allows you to ride out any temporary market downswings. On top of this, it also aids the process of compounding returns, which is key to making serious gains.
Over time, the stock market has a track record of delivering favourable returns to investors. For example, the average annual return of the FTSE 100 index over the last 30 years has been around 8%. The FTSE 250’s is even higher at approximately 12%.
Those investing money in the stock market can expect to realise a decent return over the long term. What’s more, if you have an investment horizon of 15, 20, or even 30 years, you have the potential to build a tidy investment pot that could even fuel your early retirement. With that in mind, I’d carry on investing in cheap UK shares today in order to build serious wealth over time.