Risks, such as Brexit and a potential second wave of coronavirus cases, may make a 2020 stock market recovery seem less likely. Indeed, they could negatively impact on the operating conditions for many FTSE 100 and FTSE 250 shares. They may also cause investor sentiment to weaken.
However, history suggests the stock market will deliver improving returns in the coming years. With many UK shares currently trading at cheap prices that are well below their historic averages, now could be a very rare opportunity to buy high-quality companies at attractive prices.
Over time, they could really boost your returns. And that means they may also help you to build a portfolio valued at over a million.
An unlikely stock market recovery?
Although an elevated level of risk may make a stock market recovery seem less likely, history suggests it’s set to take place over the coming years. For example, since its inception in 1984, the FTSE 100 has experienced several crises. These inlcude the 1987 crash, the ERM challenges in the 1990s, the tech bubble and, of course, the global financial crisis.
Even including its recent coronavirus crash, the index has returned over 8% per annum, when dividends are included.
As such, there may be a period of volatility. That may even include a second market crash in the coming months. However, over the long run, the share prices of high-quality companies are likely to recover. This could provide an opportunity for investors to buy them at low prices while investor sentiment is weak. And also sell them at significantly higher prices in the long run.
Undervalued stocks
Of course, some UK shares are undervalued for good reason. They may not, therefore, take part in a stock market recovery. For example, they may have high debt levels, or operate in a sector unlikely to experience rising demand over the coming years.
Therefore, it’s important for investors to select the strongest businesses in the most attractive sectors. They may not trade on the lowest valuations on offer at the present time. But their growth rates over the coming years may mean they’re worthy of significantly higher valuations than those at which they currently trade.
Making a million
A stock market recovery can produce exceptional returns. As mentioned, the FTSE 100 has delivered a total return of 8% per annum in the last 36 years. However, investors who have bought during periods of weak economic performance while stock prices are low may have enjoyed significantly higher returns than those of the wider market.
Undervalued stocks may not remain this cheap forever. Therefore, now could be a rare opportunity to buy a diverse range of companies to benefit from a likely future of new record highs for indexes such as the FTSE 100 and FTSE 250.