Buying cheap stocks after the recent market crash may not seem all that appealing to many investors. With the potential for a second wave of coronavirus across many of the world’s major economies, stock prices could come under further pressure in the coming months.

However, the past performance of the stock market shows that it has always been able to recover from crashes to post new record highs. Therefore, buying cheap stocks that have solid financial positions today could provide you with the greatest scope to benefit from a turnaround for equities over the long run.

Recovery potential

While a return to previous highs may not seem all that likely in the short run (despite the recent rally), over the long term it seems probable. The stock market has a strong track record of recovering from challenges such as the global financial crisis, the tech bubble and many other difficulties that have caused investor sentiment to weaken and cheap stocks to become more widely available.

Certainly, coronavirus is an unprecedented event for investors to overcome. It is still too soon to know how significant its impact will be on a wide range of sectors and economies. But previous downturns and bear markets have spawned the same uncertainties among investors. Yet, sentiment has always proceeded to improve after even the most severe declines in stock prices.

Buying cheap stocks

Many investors aim to buy stocks when they are low, and sell them when they are high. One of the main difficulties in implementing this strategy is that for a stock to be cheap, there often must be a significant risk ahead that prompts weaker financial performance or declining investor sentiment.

At the present time, many of the risks facing the world economy appear to have been priced in to stock valuations by investors. Therefore, it is possible to buy high-quality businesses while they are trading on low valuations. This could provide you with a more attractive risk/reward opportunity, since buying any asset at a lower price can provide greater scope for capital growth.

Although there is a risk that cheap stocks will continue to fall in price, over the long run many valuations on offer across the stock market suggest that a wide margin of safety may already be on offer.

Financial strength

Of course, for cheap stocks to deliver on their long-term recovery potential, they must survive a challenging short-term outlook. Therefore, it is vital that investors select companies that have attributes such as modest debt levels, dominant market positions and the right strategies to reduce costs if required in the short run.

Through buying the most appealing businesses while they trade on low valuations, you could boost your portfolio’s long-term growth prospects and improve your financial circumstances in the coming years.

More reading

• Where I would invest $50,000 into ASX shares immediately
• How I’d invest in today’s market to make a million
• Why ETFs are great for passive investing
• Where to invest $10,000 into ASX shares next week
• Why the ultra-rich are hoarding gold

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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If I were fortunate enough to have $50,000 sitting in a savings account, I would consider putting it to work in the share market.

After all, the potential returns on offer are vastly superior to what you’ll get from an Australia and New Zealand Banking GrpLtd (ASX: ANZ) savings account.

For example, at present, ANZ is offering a lowly 0.05% per annum standard variable rate. This is roughly in line with what the other big banks are offering and would yield just $250 in interest per year.

As a comparison, over last 30 years the Australian share market has generated an average annual return of approximately 9.5%. If it were to do this again over the next 12 months, your $50,000 would turn into $54,750.

With that in mind, I have picked out three top shares which I think could provide strong returns for investors over the coming years. They are named below:

Altium Limited (ASX: ALU)

Altium is a printed circuit board design software company which is benefitting greatly from the rapidly growing Internet of Things (IoT) market. With more and more electronic devices being designed and manufactured, the company has been experiencing increasing demand for its key Altium Designer product. And with the IoT market tipped to grow materially in the future, Altium looks well-placed for growth.

Domino’s Pizza Enterprises Ltd (ASX: DMP)

Another ASX share to consider buying is Domino’s. I think the pizza chain operator would be a great option for these funds due to its strong brand, popular product, and its positive long term outlook. Over the next five years Domino’s aims to deliver annual same store sales growth of 3% to 6% and annual organic new store additions of 7% to 9%. I expect this to underpin strong earnings growth for many years to come.

NEXTDC Ltd (ASX: NXT)

A final ASX share to consider buying is this data centre operator. NEXTDC has been experiencing significant and growing demand for its world class centres over the last couple of years. This has particularly been the case in 2020 after the pandemic accelerated the shift to the cloud. I expect this trend to continue and support very strong earnings growth as it scales.

More reading

• 3 quality ASX shares to buy now to get rich later
• I would buy and hold Kogan and these ASX shares until 2030
• 3 ASX shares I’d buy because of the online sales boom
• Should you buy Domino’s shares right now?
• 2 ASX shares to buy for beginners

James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia has recommended Domino’s Pizza Enterprises Limited. 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.

The post Where I would invest $50,000 into ASX shares immediately appeared first on Motley Fool Australia.

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The recent share market crash could present a buying opportunity for investors who can adopt a long-term approach to their portfolios. Of course, in the short run, many share prices could experience declines, should the global economic outlook deteriorate.

However, by focusing your capital on the highest-quality shares available and diversifying across a range of sectors, you could obtain a favourable risk and reward ratio while prices are low. This could increase your chances of making a million over the coming years.

A long-term approach

Investing during, or shortly after, a market crash can lead to disappointing results in the short run. For example, the economic impact of coronavirus may prove to be worse than investors are factoring. This may cause share prices to experience further falls that produce paper losses for investors.

As such, it’s important to adopt a long-term approach when investing during high share market volatility. The track record of equities shows that they experience periods of decline at fairly regular intervals. However, these periods have been followed with strong recoveries leading to record share market highs. As such, buying shares today while they offer wide safety margins could enable you to benefit from the long-term recovery potential.

A focus on quality

As with every economic downturn, some companies will not survive. For example, it may experience a decline in sales and be unable to pay fixed costs. Or, it may have taken on too much debt during the economic boom and be unable to service it.

Therefore, it is worth assessing the financial strength of a business before purchasing a slice. This may include focusing on its debt levels, cash flow strength and interest coverage ratio to realise the likelihood of it surviving a period of low sales. It may also be worth checking the company’s performance in prior economic downturns to assess its defensive characteristics when sales were under pressure.

Diversifying across multiple sectors

On top of buying high-quality companies for the long term, diversifying across sectors may be a sound move during a market crash. Some sectors, such as travel and leisure, may struggle to emerge intact from the current crisis. They may face a prolonged period of weaker demand that reduces return prospects.

As such, having exposure to a range of sectors could reduce overall risk and improve return prospects. This could enable you to fully access the share market’s long-term recovery potential. And it could boost your chances of generating a 7-figure portfolio in the coming years.

More reading

• Why ETFs are great for passive investing
• Where to invest $10,000 into ASX shares next week
• Why the ultra-rich are hoarding gold
• Which shares to buy if the ASX tumbles
• 2 blue chip ASX 200 dividend shares to buy next week

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.

The post How I’d invest in today’s market to make a million appeared first on Motley Fool Australia.

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