With the stock market still in the process of recovering from last year’s volatility, there are currently plenty of cheap shares for investors to capitalise on.
It’s no secret that buying low and selling high is the ultimate recipe for building long-term wealth. Unfortunately, that’s often easier said than done, with plenty of investors inadvertently doing the complete opposite.
However, many people are still on edge over what are ultimately short-term problems. Therefore, finding bargains in today’s financial markets isn’t as complicated. And for those with £2,000 to spare, investing in top-notch stocks at discounts could potentially quintuple this money in the long run.
Making the most of cheap stocks
Looking at the FTSE 250, growth stocks in the UK have historically generated average returns of around 11%. And assuming an investor merely matches these gains by investing in a low-cost exchange-traded fund, it would take roughly 15 years to hit the milestone of £10k, providing no additional capital is injected during this timescale.
Obviously, waiting a decade and a half to build a five-figure portfolio is far from ideal. But the process can be greatly accelerated by injecting an additional £100 each month. Doing so would bring the waiting time down to just four-and-a-half years. But not everyone can do this consistently. So what’s the alternative?
This is where stock picking enters the picture. And it’s how investors can maximise their potential gains by capitalising on cheap shares as and when they appear.
A stock is ‘cheap’ when there is a material mismatch between the share price and value of the underlying business. Under normal market conditions, finding such opportunities can be challenging without detailed knowledge about corporate valuation. But when emotions are running high in times of elevated volatility, the process becomes far more straightforward.
Buying and holding undervalued shares is how billionaire investors like Warren Buffett built their fortunes. And even if an investor manages to muster an extra 3% in annualised gains, that’s enough to significantly cut the waiting time.
Stock picking has its risks
Chasing market-beating returns can pave the way to substantially more wealth in a much shorter time. However, hand-selecting specific stocks instead of investing through an index fund comes with a lot of extra concerns and considerations.
For starters, portfolio management is now entirely down to the investor. And even after successfully identifying cheap shares that can go on to be massive winners, a poorly constructed portfolio can severely undercut the long-term potential.
In fact, there’s a good chance that a badly formed or managed investment strategy will actually destroy wealth rather than create it. And, consequently, transforming £2,000 into £10k may never happen.
Nevertheless, these risks can be partially mitigated. And providing that investors take a careful, disciplined approach, leveraging cheap shares to grow wealth can be an immensely financially rewarding endeavour in the long run.
