Many UK shares have been decimated over the last 18 months. But the track record of the British stock market shows that a rally is on the horizon. Indexes like the FTSE 100 and FTSE 250 have persevered through multiple crashes and corrections, each time recovering and rising to new heights.
Today, there remains plenty of short-term uncertainty. So it’s impossible to know exactly when this long-awaited rally will kick off. But by preparing in advance, investors can position their portfolios to capitalise on the positive momentum once it eventually materialises. Here’s how.
Finding the best investments
Let’s assume an investor has £5,000 of spare cash earmarked for long-term investments. What would be the best way to put this money to work?
While this is a simple question, it’s a difficult one to answer due to the countless personal factors that surround investment decision-making. After all, everyone has different risk tolerances and goals. As such, investing in a high-growth enterprise can make perfect sense for one individual while also being outlandishly unsuitable for another.
Regardless, there are some common traits among businesses that all long-term investors should be focused on during the stock-picking process. Right now, financial health is a good place to start.
Following the interest rate hikes by the Bank of England to combat inflation, debt has become very expensive. And overleveraged balance sheets now pose a serious problem to even the largest of businesses. The higher cost of capital also re-emphasises the importance of free cash flow since it ultimately enables firms to become financially independent, even if they’re unprofitable.
Obviously, analysing a business or stock doesn’t end here. But by using these traits, it’s possible to quickly eliminate poor investment candidates from consideration.
Strategic purchasing
A quick glance at the VIX volatility index shows that stock price fluctuations across the board have started to calm down compared to the start of 2023. However, volatility is still out there. And some UK shares that look cheap today could end up becoming cheaper in the coming weeks should investor sentiment take a turn for the worse.
That’s why drip-feeding the £5,000 into high-quality shares over time might be the better approach versus throwing it all in one giant lump sum. This does result in more transactions and, in turn, fees. But it also means if a top-notch stock continues to drop despite the long-term thesis remaining intact, investors still have capital at hand to buy more shares at an even better price.
However, it’s important to carefully inspect why a stock is moving in the wrong direction. After all, a new piece of information may have come to light that invalidates an original investment thesis. In such scenarios, it may be wiser to simply cut losses and reallocate the capital into a different enterprise.
