Investing £3,000, or any other amount, in UK shares after the stock market crash may not necessarily be a profitable move in the short run. The stock market may yet experience a further downturn due to risks such as coronavirus and Brexit.
However, now could be the right time to buy bargain shares for the long run. In many cases, they trade on valuations significantly below their historic averages. Indexes such as the FTSE 100 and FTSE 250 having always recovered from their downturns to post new record highs. So the prospects for many UK shares appear to be attractive from a long-term perspective.
Buying cheap UK shares after the market crash Perhaps the most obvious thing to do after a market crash is to buy the cheapest stocks that you can find. This can be a sound idea, but comes with the caveat that any stocks purchased should be high quality. That’s both in terms of their financial positions and long-term growth outlooks. If not, you may end up building a portfolio of stocks that are cheap for good reason, in terms of having weak recovery potential.
Assessing the quality of any business is very subjective. However, financial metrics, such as debt compared to equity and the number of times interest payments can be made from operating profit, provide guidance on how solid a company’s foundations may be.
At the present time, how a business will react to changing market conditions caused by coronavirus may also be highly relevant. Some industries could change significantly in the coming years, due to evolving consumer trends. As such, businesses will need a clear plan to adapt their operating models following the recent market crash.
Diversification The market crash may have caused the vast majority of UK shares to decline in value. But in the coming years, some companies are bound to perform better than others. Therefore, it’s imperative to include a broad mix of businesses in your portfolio.
For example, some industries may enjoy stronger growth rates than others. Meanwhile, some countries may perform better than the global average. Ensuring you have exposure to a variety of businesses means there’s a lower chance of being focused on industries and/or countries that fail to produce impressive growth rates.
The majority of the FTSE 100’s revenue, and around half of the FTSE 250’s sales, are generated from international markets. So UK investors are likely to find the process of diversifying relatively straightforward after the market crash.
Not only does diversification reduce overall risks, it may also enable you to benefit from a wider range of businesses. And that, over time, may enhance your portfolio returns. It may also enable you to experience a likely recovery in the stock market after a challenging period in 2020.
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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.
Motley Fool UK 2020