Buying cheap shares today and holding them for the long run could lead to high returns. As such, now could be the right time to build a portfolio of stocks.
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The stock market crash means that there are a relatively large number of cheap shares available to buy today. Certainly, some stocks have recovered following the market’s downturn earlier this year. But weak investor sentiment towards a range of sectors means it is possible to build a diverse portfolio of undervalued companies.
With many bargain stocks being high-quality businesses, they could deliver impressive returns as the economy recovers. They may also produce high income returns that catalyse your portfolio over the coming years.
High quality businesses may be undervalued
Not all cheap shares are weak businesses. In many cases, high-quality companies are trading at prices that are significantly lower than their historic averages due to the uncertain economic outlook. This has caused investors to demand wide margins of safety even where a company has the financial means to return to strong growth over the long run.
While a challenging economic environment may impact negatively on the performances of many companies this year, over the long run those businesses with solid finances and wide economic moats have the potential to produce strong profit growth.
Buying cheap shares may be a means of accessing such companies while investor sentiment is weak. Over time, investor sentiment has the potential to improve, while their profitability may do likewise. This could have a positive impact on your portfolio’s performance in the long run.
An economic recovery is likely
Cheap shares could be among the stocks that benefit the most from an economic recovery. Their low prices may provide significant scope for a turnaround in the coming years.
While an economic recovery may seem unlikely at the present time, a similar feeling is often present during downturns and bear markets. However, the world economy has always returned to positive GDP growth even after its most difficult periods. As such, the same outcome is very likely to come into existence as current risks facing the global economic outlook gradually recede.
Furthermore, the scale of monetary policy stimulus that is being used in major economies could mean that asset prices move higher over the long run. This could lift the valuations of cheap shares and produce impressive returns for investors.
Income opportunities provided by cheap shares
Cheap shares may also have high dividend yields. While this may not seem to be relevant to some investors, such as those individuals who are seeking growth rather than income, a large proportion of the stock market’s historic total returns have been derived from the reinvestment of dividends.
Therefore, buying stocks with high yields could be a means of obtaining a higher total return in the long run. High-yielding shares may also become more popular due to continued low interest rates that push their prices higher in the long run. This could boost your portfolio’s performance and improve your financial situation.
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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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.