Forget the housing market! I’d buy cheap stocks today

While there are many cheap stocks available to buy right now, some investors may be considering other opportunities such as the housing market. Low interest rates that could persist for a prolonged period of time could mean that house prices perform relatively well in the coming years.

However, with the stock market offering greater diversification potential, lower valuations and a solid track record of recovery from bear markets, it could be a better means of improving your financial prospects.

Diversification potential

Buying a portfolio of cheap stocks is a relatively straightforward option for almost any investor due to the low cost of sharedealing. Online sharedealing has become increasingly prevalent over the past decade, and features such as regular investing opportunities mean that commission costs can be exceptionally low.

As such, reducing overall risks within a portfolio of shares is much easier than it is within the property sector. Due to the high cost of owning just one property, in terms of the amount required for a deposit, many investors may end up with a small number of houses or apartments in their portfolios. This could lead to disappointing returns should there be a problem, such as unexpected repairs, with even just one of their properties.

By contrast, a portfolio of cheap stocks could offer less risk. Even if one company reports disappointing results, this may be mitigated by strong performances from other holdings within a portfolio. This may lead to higher returns in the long run than a more concentrated portfolio of properties.

Exceptionally cheap stocks

The recent market crash means that there may be a larger number of cheap stocks available at the present time than would normally be the case. In some sectors, it is possible to buy high-quality businesses at prices that are significantly below their long-term averages. This suggests that they offer wide margins of safety, and could deliver impressive total returns in the coming years.

Meanwhile, house prices may be less attractive than stocks from a value perspective. House prices have moved higher over the past couple of decades, and may not yet reflect a changing economic outlook. As such, there may be less scope for capital growth than there is within the stock market.

Recovery prospects

Furthermore, the stock market has an excellent track record of recovery from its bear markets. In fact, it has always produced new record highs after each of its past downturns. This suggests that investors who are able to buy cheap stocks now while the wider market is at a relatively low ebb could profit from a likely recovery.

This opportunity may not necessarily be available within the housing market due to the high valuations that are currently present. Therefore, now may be the right time to buy undervalued shares, rather than seeking to build a property portfolio.

More reading

• Here are easy ways to diversify your ASX portfolio
• 3 surging ASX defence shares to buy next week
• Should fixed-interest investments be part of your ASX share portfolio?
• 5 steps to start investing in ASX shares
• Emergency funds: Are they still important?

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.

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