The recent stock market rally hasn’t changed how I’d invest in UK shares for the long term. After all, the stock market’s price level shouldn’t affect the process of determining how to invest capital.
High-quality companies that trade at cheap prices may be more difficult to find after the recent stock market recovery. After all, the FTSE 100 has gained 10% in the past month.
However, by searching within unpopular sectors and taking a long-term view, it may be possible to build a surprisingly large portfolio over the long run. An investor may even be able to make a million.
How I’d invest to capitalise on a long-term stock market rally
Buying high-quality businesses at cheap prices is how I’d invest to take advantage of a likely long-term stock market rally. The track record of the FTSE 100 suggests UK shares can continue their recent gains to post new record highs over the long run.
In fact, the index has always recovered from its past declines to make new highs. As such, buying UK shares now while the FTSE 100 continues to trade below its 2020 starting price could be a shrewd move.
Of course, not all sectors have gained as much ground as the FTSE 100 over recent weeks. Many industries face very challenging operating conditions in the short run. That means investor sentiment towards them is still comparatively weak. As such, there may be opportunities to buy cheap shares even after recent stock market gains.
Clearly, some cheap shares are likely to be priced at low levels for good reason. For example, they may have weak balance sheets or poor strategies. However, avoiding such businesses and instead purchasing financially-sound stocks with wide economic moats is how I’d invest at the present time. They may be better able to cope with short-term challenges. They may also deliver improving profit growth in the long run and benefit from an upward rerating to their valuations in a long-term stock market rally.
Making a million from cheap UK shares
Making a million from cheap UK shares may sound more feasible to investors after the recent stock market rally. However, it hasn’t changed how I’d invest to capitalise on the long-term growth potential of the FTSE 100 and FTSE 250. Buying high-quality businesses at cheap prices could produce market-beating returns in a likely stock market recovery over the long run.
Even if an investor obtains the same return as the FTSE 100 has delivered in the past from a basket of UK shares, they could build a £1m portfolio in the coming years. For example, investing £750 per month at the FTSE 100’s historic annual return of 8% would produce a portfolio valued at over a million within 30 years.
However, with many cheap, high-quality shares still available to buy, there may be opportunities to reduce the time it takes to build a seven-figure portfolio.
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.