Despite the stock market making decent progress in recovering from the 2022 correction, it’s still possible to build a portfolio filled with undervalued UK shares.
The FTSE 100 index may be up since the start of the year. But this positive trend seems to be driven by just a handful of companies. As such, plenty of leading British stocks have yet to make a comeback.
Therefore, long-term investors currently have the fortune of being presented with plenty of buying opportunities for high-quality enterprises trading below their intrinsic valuation. And over time, these businesses could deliver superior returns for patient investors.
They may even treble in value as the economy and, in turn, the stock market finish recovering from all the recent volatility.
Using cheap UK shares to generate higher returns
Buying and holding undervalued businesses is a proven investment strategy for building wealth. And it’s how famous investors like Warren Buffett made their fortunes.
The idea is pretty straightforward. Find a top-notch enterprise with a sound long-term strategy, a talented management team, and robust financials trading at a cheap price. Providing the investment thesis is correct, given sufficient time, the share price will rise to reflect the progress and earnings of the underlying business.
Of course, this is often easier said than done, especially under normal market conditions. But today, finding such opportunities has become far easier. Why? Because with all the uncertainty surrounding rising inflation and interest rates, stock prices are in the gutter. And that includes companies largely unaffected by the changing economic landscape.
Don’t forget in the short term that UK shares are driven by mood and momentum. So when pessimism is high, even the best businesses in the world can be caught in the panic-selling crossfire. But once nerves cool off, these shares are some of the first to begin an upward trajectory. And prudent investors who buy while everyone else is selling are positioned to gain the most.
Trebling an investment
Increasing the value of a portfolio by 200% may not always be as challenging as most people believe. But it takes time. Since its inception, the FTSE 100 has historically provided a return of around 8% per year. And when left to compound at this rate, a portfolio could theoretically treble within roughly 14 years.
But achieving a greater return is possible for those capitalising on cheap, high-quality UK shares today. And that could significantly cut the waiting time. For example, a carefully constructed and managed portfolio that generates a 12% annualised return could treble in under a decade. And investors who prove to be as skilful as Buffett could do it in less than six.
| Year(s) | 8% Annualised Return | 12% Annualised Return | 19.8% Annualised Return |
|---|---|---|---|
| 0 | £10,000 | £10,000 | £10,000 |
| 1 | £10,830 | £11,268 | £12,170 |
| 2 | £11,729 | £12,697 | £14,811 |
| 3 | £12,702 | £14,308 | £18,025 |
| 4 | £13,757 | £16,122 | £21,936 |
| 5 | £14,898 | £18,167 | £26,696 |
| 6 | £16,135 | £20,471 | £32,489 |
| 7 | £17,474 | £23,067 | |
| 8 | £18,925 | £25,993 | |
| 9 | £20,495 | £29,289 | |
| 10 | £22,196 | £33,004 | |
| 11 | £24,039 | ||
| 12 | £26,034 | ||
| 13 | £28,195 | ||
| 14 | £30,535 |
Of course, these are only estimates and need to be taken with a giant pinch of salt. Stock picking is hard. And while cheap valuations make life a bit easier for finding bargains, an enormous amount of due diligence is still required.
A poorly constructed portfolio or flawed investment strategy could easily result in the destruction of wealth rather than the creation of it. And it could take far longer than anticipated to treble an investment in real terms when taking inflation into account.
Investing isn’t risk-free. And for those seeking to treble their money quickly, the risk level is only amplified. However, by taking a patient and disciplined approach to UK shares, investors can unlock significant wealth in the long run.
