Many shares have not yet recovered from the 2020 stock market crash. Despite improving investor sentiment and the prospect of a brighter economic outlook in the long run, some stocks continue to trade at cheap prices.
Buying them could prove to be a profitable long-term move. Through building a diverse portfolio of high-quality companies that are presently experiencing weak operating conditions, it may be possible to generate a surprisingly large nest egg in the coming years.
Buying high-quality shares after the stock market crash
A number of todayâ€™s cheap shares are still unpopular many months after the stock market crash because of their weak near-term outlooks. Some sectors, such as energy, financial services and leisure, are facing unprecedented challenges at the present time. In many cases, their potential to grow sales and profit in the short run is very limited. As such, investor sentiment towards them is weak. This has caused their share prices to lag the wider index in many cases.
Buying such companies may not seem to be an attractive idea to many investors. However, those companies that have difficult operating conditions, while also having solid financial positions and a competitive advantage, may offer recovery potential over the long run. They may emerge in a stronger position after the stock market crash relative to their weaker sector peers. This may enable them to deliver improving financial performances in the coming years that translates into rising stock prices.
Diversification in a stock market recovery
It is easy to become complacent as a stock market recovery replaces a stock market crash. This may lead to a portfolio that lacks diversity, in terms of the number and range of companies that are held within it.
However, as this yearâ€™s market decline showed, a bull market can quickly turn into a bear market without warning being given. Therefore, while it may be tempting to only invest in the very best shares available at the present time, ensuring a portfolio is diversified could be crucial in generating high returns in the coming years. After all, it is unclear which companies and sectors will deliver growth in what could be a fast-paced and different economic outlook in a post-coronavirus world.
A long-term approach to buying cheap shares
Of course, a second stock market crash could occur in the near term. Risks such as Brexit and the coronavirus pandemic may remain in place for some time. They could prompt a period of weaker investor sentiment and a more challenging period for the world economyâ€™s performance.
As such, taking a long-term view of any stocks purchased at the present time could be important in generating high returns. The stock market has always posted new record highs after its various declines. Using a buy-and-hold strategy may enable an investor to take advantage of a similar outcome after the 2020 stock market crash.
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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 aÂ diverse range of insightsÂ makes us better investors. The Motley Fool has aÂ disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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