Stock market rally: why I'd invest today to achieve financial freedom

Investing money in shares today could allow an investor to capitalise on a likely long-term stock market rally. This may increase their chances of achieving financial freedom.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

More on Cheap Shares

salesman explaining product on computer screen to couple
Cheap Shares

2 compelling ASX shares on sale right now

These stocks offer appealing value, in my opinion.

Read more »

A man thinks very carefully about his money and investments.
Cheap Shares

Here are 2 cheap ASX 100 stocks to consider buying in July

These shares are unloved by the market right now...

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors in July

Here’s why these stocks look like bargains to me…

Read more »

Cheerful boyfriend showing mobile phone to girlfriend in dining room. They are spending leisure time together at home and planning their financial future.
Cheap Shares

This ASX dividend share could be the biggest bargain you can buy

This business is both really cheap and offers big dividends.

Read more »

An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.
Cheap Shares

1 stellar Australian stock down 43% from all-time high to buy and hold forever

There are plenty of reasons to like this Australian stock.

Read more »

A woman is excited as she reads the latest rumour on her phone.
Cheap Shares

3 popular ASX stocks that look dirt cheap right now

Let's see which shares analysts think are being undervalued by the market.

Read more »

Two excited woman pointing out a bargain opportunity on a laptop.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors

I think these stocks are too cheap to ignore.

Read more »

A man looks surprised as a woman whispers in his ear.
Cheap Shares

Recent dip buyers won big: 3 ASX shares that could repeat the feat

Analysts think these cheap shares could bounce back strongly.

Read more »