Deciding what to do with hard-earned cash often comes down to a trade-off between risk and reward. In other words, the higher the risks, the higher the potential rewards.
With the National Lottery, the risk of loss is extremely high due to the low odds of winning. But for those who do win, the rewards are exceptionally high.
While this may appeal to many individuals, the reality is that it may be more prudent to focus on undervalued shares. They could offer high returns, while their margins of safety may mean that many of the risks they face are priced in. As such, when it comes to retirement planning, now could be the right time to focus on undervalued shares across the FTSE 100 and FTSE 250.
While value investing is often viewed as simply buying stocks with low price-to-earnings (P/E) ratios, in reality there is far more to it than that. Value investors do check the price of a stock, but would only consider it to offer good value for money if its prospects are stronger than the stock market is currently pricing in. This may mean that stocks which trade on premium valuations still have appeal to value investors, while some dirt-cheap stocks may be viewed as value traps.
Although value investing is not an especially popular means of investing at the present time, with many investors instead focusing on growth or on trading stocks, in the long run it has a solid track record of success. As with anything in life, buying an asset at a price that is less than it is worth is a sound means to save money. When it comes to shares, it is also a worthwhile means of generating higher investment returns in the long run.
While the FTSE 100 and FTSE 250 are not at their cheapest-ever levels, they appear to offer good value for money at the present time. They may trade fairly close to their all-time highs, but the growth prospects that many of their incumbents offer suggests that they may be trading significantly below their intrinsic values.
In the case of the FTSE 250, its UK focus means that investors may have fully priced in the risks facing the UK economy from the implementation of Brexit. With the FTSE 100, the risks facing the world economy, such as the prospect of a global trade war, could mean that there are a number of buying opportunities on offer. That’s especially the case since both indices have high yields compared to their historic averages, with the FTSE 100 yielding over 4% and the FTSE 250 having a yield of over 3%.
While the National Lottery may offer more excitement in the short run, value investing could provide a sound financial future for a range of investors. Through buying good-quality shares at appealing prices, retiring early may become a more realistic option over the long run.
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