The stock market crash has led to an abundance of cheap UK shares. However, at the same time, many investors are moving away from FTSE 100 and FTSE 250 buying opportunities in favour of other assets such as Bitcoin.
Certainly, the virtual currency has produced impressive gains in recent months. For example, it has risen almost 50% this year while the FTSE 100 has moved 20% lower.
However, in the long run undervalued shares could offer superior returns than the cryptocurrency. Their low valuations could even help you to make a million.
The track record of the stock market shows that buying cheap UK shares can be a profitable long-term strategy. Indexes such as the FTSE 100 and FTSE 250 have experienced a number of downturns over recent decades. While they have caused paper losses for investors in the short run, they have also presented buying opportunities because the stock market has always recovered from bear markets to experience bull markets.
Therefore, today’s low stock market valuations are unlikely to remain in place in the long run. Ultimately, the economic outlook is likely to improve. This could cause stronger financial performances from listed companies that helps to encourage greater risk-taking from investors. The end result could be a rising stock market that produces impressive capital gains for investors who purchased a diverse range of stocks while they traded at low prices.
Focusing on high-quality companies
Of course, some of today’s cheap UK shares may not recover from their present challenges. For example, they may have weak financial positions that do not allow them to take part in a likely economic recovery. Or they may lack the right business model to adapt to changing consumer sentiment.
Therefore, it is important to identify undervalued stocks trading at prices that do not fully reflect their financial positions and outlooks. This may involve investors buying companies with strong balance sheets and a clear path to growth as the economy recovers. Doing so may enable you to outperform the stock market in the long run. However, even if you achieve the same return as the wider index, you could still obtain a portfolio valued at over £1m within your lifetime.
For example, the FTSE 100 has returned around 8% per annum on a total return basis since its inception in 1984. Assuming that rate of return on a £500 monthly investment could produce a portfolio valued at over £1m within 35 years. However, by purchasing cheap UK shares now, you could obtain a higher rate of return that helps to produce a seven-figure portfolio at a faster pace.
Avoiding Bitcoin to buy undervalued stocks
With many cheap UK shares currently available, there appear to be better buying opportunities than Bitcoin. The virtual currency may have risen recently, but its lack of fundamentals and regulatory threats mean that its overall risks may be higher than some investors are anticipating. Therefore, building a diverse portfolio of undervalued shares could be a more logical means of improving your financial position in the coming years.
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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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