Buying the best undervalued UK shares today may not necessarily improve your financial position over the coming months. Risks, such as Brexit and a potential second wave of coronavirus, may cause a second market crash that produces paper losses for investors.
However, over the long run, the risk/reward prospects of a portfolio of undervalued stocks could be very attractive. They’re likely to offer recovery potential and scope to diversify. And that makes them significantly more appealing than other assets, such as Bitcoin.
The recovery potential of UK shares
Many investors may still be doubting the recovery potential of UK shares after the recent rebound from the market crash. Some stocks are now fully recovered from their declines in the early part of the year. But many others face tough trading conditions that could hold back their performance.
When added to a weak economic outlook and risks such as Brexit and coronavirus, this may naturally mean many investors are cautious about their prospects.
However, it’s been a similar story during previous periods of economic difficulties. For example, following the 1987 crash, the tech bubble and the global financial crisis, there was an extended period when investor sentiment was weak, and very volatile.
Therefore, buying a basket of UK shares today could be a shrewd move in the long run. It may enable you to benefit from a likely stock market recovery. And that could outperform the return prospects of other assets such as Bitcoin. Indeed, its regulatory risks and lack of fundamentals have the potential to cut short its recent growth.
As well as offering high return prospects, UK shares also have strong diversification potential. Due to the low cost of sharedealing, it’s relatively straightforward for almost any investor to build a diverse portfolio of stocks that reduces the risk of one company’s negative performance affecting the overall return outlook. This may lead to higher returns in the long run, as well as less volatility in the meantime.
This may be an even more crucial period in which to diversify. With the coronavirus pandemic affecting some countries and industries more than others, having exposure to a range of businesses could be extremely useful for all investors.
As such, a portfolio of stocks appears to be significantly more appealing than other assets such as Bitcoin. Their lower overall risks and the potential for recovery in the coming years means that now could be the right time to build a portfolio of cheap UK shares following the recent market crash.
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