November 26, 2020

Why I’d buy cheap shares in an ISA after the stock market crash to make a million

The stock market crash has caused significant disappointment for many ISA investors. The values of some of their holdings may have declined despite the recent rebound for indexes such as the FTSE 100 and FTSE 250.

While this may seem like the right time to buy less risky assets, it could in fact be the perfect opportunity to buy high-quality businesses at low prices. In doing so, you could generate higher returns from cheap UK shares as the economy recovers. It may even increase your chances of making a million.

Buying cheap shares after a stock market crash

The natural response to a stock market crash is to avoid UK shares. After all, weak investor sentiment can send their prices even lower in the short run. However, this plan may not be a logical step for any long-term investor to take.

After all, a large proportion of FTSE 100 and FTSE 250 shares have the financial means to survive short-term challenges. And the ability to adapt to changing industry conditions over the long run.

Therefore, buying them now while they offer a wider margin of safety than they have done for many years could be a logical means of generating high returns in the long run.

For example, some financially-sound FTSE 100 companies with solid market positions currently trade significantly below their average valuations from the past decade. While it may take time for them to recover, they’re likely to benefit from the next economic boom.

Buying them after the stock market crash, while they offer good value for money, may be a means of locking-in future capital gains as their financial performances improve.

Building an ISA portfolio to make a million

Buying cheap shares following the stock market crash could be a means of improving your prospects of building an ISA valued at over £1m. Certainly, the stock market’s long-term average returns of around 8% mean that investing £100,000 today, or £750 per month, would lead to a portfolio valued at over a million within 30 years. However, buying cheap shares may provide scope for even higher returns over the long run.

Evidence of this can be seen in the performances of cheap stocks following previous market declines. For example, following previous bear markets, such as the 1987 crash, the dot com bubble and the global financial crisis, undervalued stocks were often among those companies that delivered the highest returns for investors in the following economic boom. Investors who bought them were therefore more likely to obtain market-beating returns.

The same outcome may seem unlikely to many investors following the recent stock market crash. However, buying high-quality businesses at low prices could be a means of capitalising on economic weakness. And benefitting from a subsequent improvement in GDP growth and investor sentiment in the coming years.

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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.

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