The past performance of equities suggests that a long-term stock market rally is likely to take place. After all, indices such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) have recorded annualised total returns in the high-single digits over recent decades despite experiencing challenging periods along the way.
Even though many shares have made gains following the 2020 stock market crash, a number of companies continue to trade at low prices. As such, buying them today and holding them ahead of a sustained bull market could increase an investor’s chances of obtaining financial freedom.
A long-term stock market rally
The prospect of a long-term stock market rally may seem unlikely to some investors at the present time. After all, risks such as political instability in Europe and a weak global economic outlook could hold back company performance and investor sentiment.
However, the past performance of the stock market shows that it has always overcome short-term threats to post impressive returns over the long run. Furthermore, the global economy is expected to recover sharply over the coming years following present challenges. With significant monetary policy stimulus already announced in major economies, the prospects for many businesses could improve dramatically over the long run. This may allow them to command higher valuations that have a positive impact on an investor’s financial outlook.
Buying cheap stocks today
Despite a likely stock market rally over the long run, many shares currently trade at cheap prices. Investor sentiment is relatively cautious, which is understandable after what was a very challenging 2020. Many investors continue to demand wide discounts to the intrinsic values of companies that trade in industries where operating conditions are tough. For example, many banking shares, energy stocks and consumer goods companies trade on valuations that could undervalue their long-term recovery prospects.
Buying a diverse range of cheap stocks could lead to high returns in the long run. They may be able to outperform the wider stock market, since their prices are starting from a low level. And, with share valuations having historically reverted to their long-term averages in the past following bear markets, a similar outcome could lift the prices of today’s cheap shares in a stock market rally.
Achieving financial freedom
Clearly, achieving financial freedom from buying shares will take a long time – even with a likely stock market rally in the coming years. However, an investor can enjoy an improving financial situation in the long run – even if they obtain the same return as the stock market has delivered in the past.
For example, assuming an 8% annual return on a $500 monthly investment, it is possible to build a portfolio valued at around $1 million over a 35-year time period. By investing money in today’s cheap shares, it may be possible to beat that rate of return and build an even larger portfolio over the same time period.
Where to invest $1,000 right now
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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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