Despite the recent stock market recovery, it’s possible to build a portfolio filled with cheap UK shares. Many FTSE 100 shares haven’t returned to their 2019 levels, with the lead index still some way off its record high.
As such, there may be buying opportunities on offer for long-term investors. In a number of cases, high-quality companies trade at cheap prices. Over time, they could deliver high returns. They may even treble in value as a global economic recovery takes hold.
Buying cheap UK shares to generate high returns
Buying cheap UK shares has been a popular strategy for many years. Its premise is simple, in terms of an undervalued asset having greater scope to deliver capital returns than an overvalued asset. It’s been used following previous bear markets. Investors who purchased cheap stocks following the global financial crisis and dot com bubble benefitted from the subsequent bull markets.
Clearly, many cheap shares are likely to be undervalued because they face difficult near-term prospects. While this may mean they experience volatile performances in the short run, the long-term prospects for the economy and their financial performance are likely to improve.
After all, every economic decline has been followed by a recovery. This may mean today’s cheap UK shares experience improving operating conditions that lift their financial performances and valuations in the coming years.
Looking beyond price when buying FTSE 100 shares
Of course, some cheap UK shares may not recover from their present challenges. A number of FTSE 100 shares face major changes within their industries. Indeed, coronavirus is likely to mean permanent shifts in consumer spending habits in the coming years.
Therefore, it’s prudent to look beyond a company’s price when deciding whether to buy it or not. Its financial strength, market position and capacity to adapt to changing industry trends could be worth assessing prior to purchase. Otherwise, an investor may end up with a portfolio that contains cheap shares priced at low levels for good reason.
Similarly, the prospects for the UK economy in 2021 mean diversification is essential. Political and economic risks may increase in the short run. Having a wide range of cheap UK shares may reduce overall risk and allow an investor to capitalise on a long-term stock market recovery.
Trebling an investment in cheap shares
Trebling an investment in cheap UK shares may be far more achievable than many investors realise. After all, the FTSE 100’s annual total returns of 8% over its 36-year lifetime means an investor would realistically treble their investment within around 15 years.
Through buying high-quality companies when they trade at low prices, it’s possible to reduce that amount of time. With many buying opportunities on offer, 2021 could be the right time to build a portfolio of undervalued stocks.
