Buying dirt-cheap shares now could lead to high returns in the long run. They may benefit from a likely stock market recovery in the coming years.
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The track record of equity markets shows that a stock market recovery has always taken place after even the very worst bear markets. Therefore, buying dirt-cheap shares today and holding them for the long run could lead to high returns in the coming years.
Furthermore, with a lack of opportunities among other mainstream asset classes, today’s cheap stocks could become increasingly attractive to a wider range of investors. This may help to push their prices even higher.
A likely stock market recovery
While there has been a stock market recovery of sorts since the 2020 stock market crash, many shares trade at cheap prices. In fact, a number of sectors continue to be unpopular among investors due to their uncertain near-term outlooks. As such, there is likely to be a wide range of dirt-cheap shares available to buy today.
Over time, history suggests that there will be a further stock market rally. After all, indices such as the FTSE 100 Index (FTSE: UKX) have always produced new record highs following their previous declines. For example, previous crises such as the dot com bubble and the global financial crisis caused significant falls in stock prices. However, within a handful of years, major indices had not only recovered, but had risen to new record highs that benefitted investors who purchased undervalued stocks.
With investor sentiment continuing to be somewhat cautious due to economic and political uncertainty, there is likely to be scope for upward reratings in the valuations of today’s cheap stocks. While this process may take time, and a stock market recovery could be somewhat volatile because of a variety of risks that are likely to remain in play in the first part of 2021, taking a long-term view of today’s cheap shares could be a profitable move.
The relative appeal of today’s dirt-cheap shares
The prospect of a long-term stock market recovery could make today’s dirt-cheap shares seem even more appealing relative to other assets. Of course, that task may not be especially challenging right now.
Low interest rates mean that the returns available on cash and bonds are extremely unfavourable. They may even lag inflation over the coming years. Similarly, gold’s high price and house price growth in the past decade mean that the stock market may offer significantly greater investment appeal.
This may shift investors from other mainstream assets towards equities. With interest rates in major economies across the world expected to remain at low levels, investor demand for equities could rise.
This may help to sustain a stock market recovery, and could benefit today’s cheapest shares the most because they have the greatest scope for capital gains. As such, investing in a diverse range of them today and holding them over the long run could be a shrewd move.
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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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