With almost no investments at 30, can these cheap shares make me rich?

Dr James Fox explains how investing in cheap shares today can help him generate wealth over the long run, even without any starting capital.

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I’m always on the lookout for cheap shares. But when I say cheap stocks, what I actually mean is stocks that are undervalued, meaning they trade for less than their intrinsic or book value.

In the past couple of weeks, we’ve experienced a stock market correction. And in this environment, it’s almost always easier to find undervalued stocks.

With a house purchase on the cards, it’s very possible that I may have no investments at the age of 30. So, how can I get rich with cheap stocks?

Let’s take a look.

The strategy

When starting with nothing, it’s important to have a long-term strategy. My preference is to use a compound returns strategy. This is essentially the process of earning interest on my interest by reinvesting year after year.

So, let’s say I can pull together £1,000 to invest in stocks after my house purchase. And then I commit to investing £500 a month, every month, and increase my commitments by 5% a year — roughly in line with hoped-for salary growth during my career.

For a compound returns strategy, I need to pick stocks paying dividends. Realistically, I can look to earn an aggregated 8% in total returns, the majority of which should come in the form of dividends.

Here’s how the strategy would work out.

YearsTotal depositsInvestment value
1£7,000£7,307
10£76,467£113,656
20£199,396£433,796
30£399,633£1,258,549
40£725,798£3,275,150

Generating over £3m from a standing start, I think that’s pretty good. I won’t be rich beyond my wildest dreams — after all, I’ve got to take inflation into account. But it’s certainly a good figure.

Hunting undervalued stocks

In February, I would have been fairly confident in finding a handful of stocks offering sizeable yields, and some growth, that could help me hit an annualised 8% in total returns. But now, after the stock market correction, I think I could do better than that.

Financial stocks is where I would have started a month ago, and it’s where I’d start today. I’ve been buying more for my portfolio as share prices have fallen.

In short, the stock market correction, which impacted financial stocks more than most, was caused by concerns about unrealised bond losses after Silicon Valley Bank had to sell bonds at a loss. However, most analysts will contend that the panic that ensued wasn’t warranted.

Of course, there are concerns that interest rates have pushed too high, and this will hurt lenders as good debt turns bad, and borrowing slows.

However, I think this is a strong sector, which some great yields and growth opportunities. Liquidity across the banking sector is stronger than it has been for a while, and bad debt is way below levels of a decade ago.

So, these are my top picks that could help me, as part of a balance portfolio, deliver the required returns.

StockDividend yieldMonth changeYear change
Barclays5.2%-19%-14%
Hargreaves Lansdown5.1%-9%-25%
HSBC4.8%-14%4%
Legal & General8.2%-10%-14%
Lloyds5.1%-10%-4%
Phoenix Group9%-4.5%-13%

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in Barclays Plc, HSBC Holdings, Hargreaves Lansdown Plc, Legal & General Group Plc, Lloyds Banking Group Plc and Phoenix Group Holdings Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Hargreaves Lansdown Plc, and Lloyds Banking Group Plc. 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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