Investing money in UK shares could be a logical move because of the prospects for a stock market recovery. Indexes such as the FTSE 100 and FTSE 250 have always bounced back to reach new record highs following their various bear markets. Since they both trade below their all-time highs, there may be scope for further capital gains after the recent stock market rally.
Clearly, risks remain elevated at the present time. There’s never any guarantee of making a profit in any stock. However, through buying companies with solid financial positions and low valuations, it may be possible to capitalise on a rising stock market price level.
Reducing risk when holding UK shares
It isn’t possible to eliminate risk entirely when investing in UK shares. Buy buying a diverse range of companies with sound financial positions can help to reduce the risk of loss.
A diverse portfolio is less likely to be negatively impacted by poor performance from one or more stocks. This means that company-specific risk is lower versus a concentrated portfolio. The economic outlook is unstable at the present time. Meanwhile, any company could run into trouble in the coming months and years. So buying a range of businesses operating in a variety of sectors could be a sound move.
So too could buying UK shares with sound finances. The decade-long bull market that ended in 2020 arguably encouraged an increasing amount of risk-taking from companies. As such, some businesses increased their borrowings to maximise returns, and failed to adequately diversify their own operations.
Buying stocks with modest debt levels and strong competitive positions in a range of areas could lead to less risk, as well as higher long-term returns.
Buying shares with low valuations ahead of a stock market recovery
Companies that have low valuations may offer greater scope for capital gains in a stock market recovery. At the present time, many UK shares in sectors such as travel & leisure, consumer goods and healthcare trade on valuations that are significantly lower than their long-term historic averages.
Certainly, they’ve experienced disruption in many cases. However, they may have the financial means to cope with slow economic growth in the short run. This means they can capitalise on a return to stronger prospects in the long run.
A value investing strategy has been relatively successful in the past for some investors. Using the ups-and-downs of the market cycle to buy high-quality UK shares when they trade at low prices seems to be a logical approach to take to maximise returns.
With a stock market recovery likely to be ahead, following this strategy could yield high returns in the coming years that may even be ahead of those on offer from the wider market.
