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A stock market recovery from the 2020 market crash is likely to take place, judging by the past performances of the FTSE 100 and FTSE 250. They’ve always bounced back from their declines to post fresh record highs.
As such, buying a diverse range of dirt-cheap UK shares now could be a shrewd move. It may enable an investor to maximise their returns in a likely stock market rally. Doing so could improve their chances of building a nest egg from which they may retire earlier than previously planned.
Despite showing signs of a stock market recovery in recent weeks, the FTSE 100 and FTSE 250 continue to trade significantly down on their 2020 starting prices. As such, many shares are priced at low levels relative to their averages over the past few years.
Buying stocks at a discount to their long-term average valuations has historically been a sound move. Stock prices have often reverted to their average levels over the long run. This could mean that today’s cheap shares have significant scope for upward reratings.
Furthermore, today’s dirt-cheap UK shares may have prices that don’t factor in their long-term growth potential, in many cases. Investors may be expecting ongoing economic challenges that persist for many years. However, fiscal and monetary policy stimulus could lead to improving operating conditions for many businesses that prompts a stock market recovery.
High-quality companies trading at low prices
The prices of many altra-cheap UK shares don’t appear to factor in their potential to take part in a stock market recovery. In fact, many high-quality businesses currently trade at prices that don’t account for their competitive positions, financial situations, or their capacity to adapt to changing market growth opportunities.
Therefore, a number of buying opportunities may exist for investors who are willing to take a long-term view of their portfolios. With many investors who are planning for retirement likely to have a long time horizon, they could have sufficient scope for today’s unpopular shares to gain momentum, as investors begin to price in their strong balance sheets and wide economic moats.
Avoiding value traps
Of course, not all of those cheap UK shares will take part in a stock market recovery. Inevitably, some stocks will fold or struggle to regain lost sales in the current economic crisis. Therefore, avoiding value traps could be a key concern for all investors. This is where a cheap stock is priced at a low level because it’s a low-quality business. Such companies could act as a drag on a portfolio’s performance over the long run.
By undertaking an analysis of cheap stocks to determine whether they offer good value for money, it’s possible to build a surprisingly large nest egg. This could improve an investor’s chances of retiring early.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.