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The stock market crash appears to have pushed some investors away from UK shares and towards less risky assets such as gold and Cash ISAs.
In the short run, this could prove to be a sound move. Indexes such as the FTSE 100 and FTSE 250 face uncertain futures that could produce paper losses for investors.
However, in the long run, a portfolio of stocks is likely to outperform less risky assets. Therefore, with share prices currently low, now could be the right time to focus your portfolio on the stock market.
Reducing risks after the stock market crash
It’s natural for any investor to feel cautious about equities after the stock market crash. The FTSE 100 continues to trade around 20% lower than it did at the start of the year, while the economic outlook is very uncertain. As such, a second downturn could realistically take place in the coming months.
Furthermore, seeking to avoid potential losses from a challenging stock market outlook is also normal behaviour. This has led many investors to sell stocks to buy gold in recent months, or to reduce risk even further by using a Cash ISA.
Gold has a long history as a defensive asset, being a store of wealth in previous downturns. Meanwhile, Cash ISAs come with no risk of loss. For some investors, this may make them attractive after the stock market crash despite their exceptionally low rate of returns.
While gold and Cash ISAs may reduce the prospect of losses in the coming months from a second stock market crash, they may also mean investors fail to capitalise on low valuations among UK shares. At the present time, many high-quality British stocks trade at prices significantly below their historic averages.
In some cases, their valuations don’t fully reflect their growth prospects or their financial situations. As such, they could offer improving share price performances in the long run.
Certainly, a recovery doesn’t seem all that likely at the present time. Economic data is mixed, while political risks are high owing to Brexit and the US election. However, the track record of the stock market shows it has always recovered from its declines to post new record highs.
It can take many years for this process to take place after a stock market crash. But investors with a long time horizon are likely to have sufficient time available to benefit from an improving economic outlook and strengthening investor sentiment.
Therefore, while buying UK shares after the stock market crash may not feel like the right move, it could lead to impressive returns in the long run. Over time, they could produce higher returns than gold or Cash ISAs that improves your financial situation.
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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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