The stock market’s recent rally means it may be more difficult to buy cheap UK shares today than it was a few months ago. After all, indexes such as the FTSE 350 have moved higher as investor sentiment has strengthened.
As such, it could be argued that waiting for the next stock market crash before buying UK stocks is a sound move. Since no bull market has lasted in perpetuity, this could offer some appeal.
However, with many FTSE 350 stocks still trading on low earnings multiples, there may be opportunities to unearth good value companies on a case-by-case basis.
Buying cheap UK shares in a stock market crash
The past performance of the stock market shows it’s been possible to buy cheap UK shares during a crash. March 2020 is a prime example of this, when even high-quality companies traded at low prices for a limited time. Other examples include the global financial crisis and dot com bubble, when investor fear caused many companies to have low prices for a short amount of time.
Such events have always occurred after a bull market. In fact, no rise in the stock market’s price level has ever been permanent. This could mean a strategy of waiting for a lower stock market price level is a sound means of capitalising on the market cycle. Buying low and selling at higher prices could realistically be a means of earning a higher return than the wider stock market over the long run.
Predicting a stock market crash
However, the problem with this plan is predicting when a stock market crash will produce a wide range of cheap UK shares. That’s a very tough task. Last year’s market decline highlighted the difficulties in trying to second-guess market movements. Ultimately, the future is always a known unknown.
Furthermore, many UK stocks continue to trade at cheap prices. Although the stock market has rallied since its March 2020 lows, indexes such as the FTSE 100 and FTSE 250 continue to trade at lower prices than they did a year ago.
This could indicate there are good-value shares on offer that can be purchased now and held for the long term. In time, they could produce impressive returns in a likely stock market recovery and a period of improved economic growth.
An uncertain future is always ahead
Therefore, waiting for a stock market crash before buying cheap UK shares could be a difficult strategy to execute. Impatience from low returns of cash and the challenges in predicting the stock market’s movements may mean that identifying undervalued shares at the present time on a case-by-case basis is a more prudent approach.
It could allow an investor to obtain favourable risk/reward opportunities on a long-term investment outlook.