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FTSE 100: I’d buy cheap UK shares now

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From the spring lows of the pandemic-induced stock market crash, the FTSE 100 has risen 29%, at the time of writing. That’s quite a recovery. But it doesn’t tell the whole story. Within the FTSE 100, there were plenty of opportunities to make some truly impressive returns. And there’s no doubt that many investors did just that.

Of the 100 shares that made up the FTSE 100 back in spring, 22 now have a current share price that is at least double what it was in the depths of the stock market crash. That means more than one in five FTSE 100 stocks have returned over 100% in just eight months. Of these, two stocks – Ashtead Group and Intermediate Capital Group – have seen their share prices treble. Intermediate Capital was the best performer over the period, with a £5,000 investment turning into £19,000.

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Market crash means superior investment returns

Now, I’m not for a minute suggesting that it’s possible for all of us to achieve these exact returns. That would involve being able to time the market perfectly and buy at the absolute market bottom. This is very, very unlikely, to say the least. But it’s possible to invest either side of the market bottom and still make some pretty impressive returns.

The average inflation-adjusted return of UK shares has been around 5% per year, over the last 50 years (1969-2018). With a current inflation rate of below 1%, it’s apparent just how well UK FTSE 100 shares have performed since the spring. The results very much support the view that buying shares at cheap valuations leads to superior investment returns. And of course, shares tend to be at their cheapest during a stock market crash, especially one linked to a frightful, deadly pandemic.

Cheap FTSE 100 stocks

To take advantage of such investment opportunities, we need to be able to recognise when shares are cheap. I don’t think it really matters if we think share prices are going to fall further. If they look cheap, then I think it’s probably a good time to buy, as long as we’re planning on holding for the long term. Just remember, by cheap I mean that the share price is cheap considering the quality of the company and that we’re getting a lot for our money. 

That’s why my favoured investment method is a cost-averaging approach. That simply involves buying more shares when prices look cheap, and less when they look expensive. This approach would have been highly effective during this year’s stock market crash. And given that we can’t be expected to be able to time the markets to perfection, I think it’s an approach that would have produced the best returns too.

Of course, I don’t think the current recovery is over by any means. In fact, I expect the FTSE 100 to keep rising over the next year, until it gets back to its pre-Covid levels. That’s assuming we don’t get any more nasty surprises. I believe the returns above are only going to amplify over the years to come. For that reason, I think now is still a great time to buy UK shares. Even if the unique opportunities of the stock market crash have mostly disappeared. 

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Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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