UK stocks form the core part of my portfolio. But, right now, many areas of the market are trading at discounts — that’s despite the FTSE 100 hovering near 7,500 after resource stocks surged.
Like many investors, I’d love to develop a multi-million pound portfolio. That’s the goal for many of us. Starting with £100,000, that would be quite easy. Two decades of compound returns and share price growth should get me there.
But what if I’m starting with nothing? Let’s take a look.
The importance of investing regularly
Firstly, it’s important to highlight that regular investments add up over time. That’s obvious, but if I’m constantly investing over decades, it can have a massive impact. For example, if I can put aside £800 a month, after 30 years, that’s nearly £300,000. But naturally, I’d be investing that money.
The FTSE 100 is actually three times larger today than it was 30 years ago. And historically, the index has provided an annual return of around 8%. So, after 30 years of investing nearly £10,000 a year, my investments could reach £1m.
I’d also need to be reinvesting my dividends to do this. This is a strategy known as compound returns and it’s essentially the process of earning interest on my interest.
I have to accept, though, that I might not achieve my aim and my portfolio’s value could fall as well as rise.
Be like Buffett
Warren Buffett is known as a value investor. This is the art of buying stocks which trade at a significant discount to their intrinsic value. While buying stocks that appear meaningfully undervalued appears a great way to maximise returns, it’s also a strategy for minimising losses.
The legendary US investor has managed a 10.5% compounded annual gain since 1965. That’s clearly pretty good when you consider the FTSE 100’s historic annual return of 8%. And it gives further credence to his strategy, picking top quality, undervalued stocks.
It’s also worth noting that Buffett invests for the long run. This doesn’t mean he doesn’t sell — he does. But value investing is about holding stocks until they’re no longer undervalued.
Less is more
While we all know diversification is positive, I’d look to emulate Buffett by investing in a limited number of stocks that I think will do exceptionally well. So instead of having 30 stocks that I moderately believed in, I’d have just 10 in my portfolio.
The FTSE could be a good place to look right now, as many stocks are trading at a discount. In fact, several stocks, including Lloyds and other British banks, haven’t been popular for years — it’s not just a reflection on the current economic situation.
While it doesn’t offer a dividend right now, I’d also look at Rolls-Royce. In the summer, it was described as “woefully mispriced” by analysts at Morgan Stanley.
So by investing in a handful of meaningfully-undervalued stocks and reinvesting over time, I could propel my portfolio forward, just like the legendary investor has done.
