The 2020 stock market crash caused many UK shares to trade at cheap prices. While some of them have rebounded, others have failed to produce a sustained recovery. They could present a rare buying opportunity for investors who have a long-term time horizon.
As such, now could be the right time to buy them as part of a diverse portfolio. Over time, they could deliver improving financial performances. This may that prompt their share prices to produce impressive recoveries that boosts your portfolio’s prospects.
A rare buying opportunity
The recent stock market crash was a relatively rare event. The last time indexes such as the FTSE 100 and FTSE 250 experienced such large losses was during the global financial crisis in 2008/09. Prior to that, the dotcom bubble occurred in the early 2000s. As such, over the past two decades, large downturns in stock prices that have wiped significant amounts of value from most shares have taken place on only a few occasions.
Therefore, they can represent infrequent buying opportunities for long-term investors. Since the stock market has always recovered from its falls to post new record highs, purchasing high-quality businesses after a market decline can be a shrewd move. It may enable you to take part in a likely recovery over the following years.
Cheap UK shares after the stock market crash
As mentioned, some UK shares have recovered after the stock market crash. However, investor sentiment towards many British stocks remains weak. This means that, in many cases, they trade on valuations that have not been seen for many years. In fact, some stocks in sectors such as banking, energy and retail are trading at exceptionally low price levels that appears to provide new investors with a wide margin of safety.
Therefore, buying such companies now could prove to be a profitable move. Provided they have sound financial positions and competitive advantages over their peers, they could offer long-term recovery potential.
Building a diverse portfolio of cheap UK shares
Of course, risks such as Brexit and coronavirus mean that another stock market crash cannot be ruled out in the medium term. As such, diversifying across a wide range of British stocks could be a sound idea. It can reduce your overall risks due to relying on a wider range of companies for your returns. It could also improve your long-term growth potential as you are exposed to a wider range of sectors.
While the threat of a second downturn in stock prices may dissuade some investors from buying FTSE 100 and FTSE 250 shares, their valuations appear to factor-in this risk. Therefore, buying and holding a range of companies now on a long-term basis could lead to impressive returns that positively impact on your financial position in the coming years.
