Taking a long-term view of shares may allow an investor to more easily capitalise on a sustained stock market rally, in my opinion.
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The stock market rally following the 2020 market crash has caused many shares to double in value over recent months.
Despite this, there are still a wide range of companies that appear to offer good value for money. Since the stock market has historically produced a sustained recovery following its declines, there may be scope for investors to double their money through buying shares today.
By taking a long-term view and purchasing high-quality companies at low prices, an investor could capitalise on the stock market’s likely long-term growth prospects.
Caution after the recent stock market rally
While the recent stock market rally may have caused optimism to rise among investors, a number of risks could negatively affect share prices in the short run. For example, political change in Europe and the US may negatively impact investor sentiment. Meanwhile, coronavirus is set to remain a threat to the operating environments of many companies. This may lead to disappointing share price performances in the coming months.
Therefore, it is crucial to take a long-term view of any investments made today. Certainly, there is potential for a number of shares to double in price from their current levels. However, expecting the recent stock market recovery to continue unabated in 2021 may lead to disappointment for investors, as well as paper losses in the short run.
The past performance of the stock market
Despite threats to the 2020 stock market rally, the long-term outlook for shares is relatively positive. Even after gains made in recent months, there continue to be a number of high-quality companies trading at low prices. Historically, they have offered the greatest scope for capital gains. Not only do they offer less risk in the short run due to the strength of the company’s market position and financial situation, their low prices offer capital growth potential.
Furthermore, the stock market has always produced new record highs following even its most challenging periods. For example, indexes such as the FTSE 100 Index (FTSE: UKX) have recorded total annual returns of around 8% since inception. Assuming the same return in future would mean it takes around nine years for an investment today to double in price. But, through purchasing undervalued stocks, it is possible to outperform the index and generate 100% returns over a shorter time period.
Building a solid portfolio of shares
It can be tempting to forget about risk management following a stock market rally such as that seen in 2020. However, it is important to always bear risk in mind, since the stock market can experience rapid change without warning.
As such, building a diverse portfolio of high-quality shares trading at low prices could be a shrewd move. It may allow an investor to capitalise on the stock market’s likely growth in the coming years, while reducing company-specific risk.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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