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£10k to invest? I think buying cheap UK shares today could help you beat the FTSE 100

Peter Stephens
·3-min read
Chart showing an upwards trend, possibly in the FTSE 100
Chart showing an upwards trend, possibly in the FTSE 100

Following the stock market crash, a wide range of cheap UK shares are currently available to buy. Although they may face uncertain near-term outlooks in many cases due to risks such as coronavirus and Brexit, their long-term growth prospects appear to be sound.

As such, building a portfolio of undervalued shares today with £10k, or any other amount, could be a sound move. Historically, buying stocks at low prices has provided scope for strong capital gains. Doing so could mean that you outperform the FTSE 100 in the coming years.

Buying cheap UK shares today

While some cheap UK shares deserve their low valuations, others may be suffering from weak investor sentiment towards the wider stock market. For example, some businesses have solid balance sheets and the right strategies to adapt to changing consumer tastes. However, risk aversion among investors may mean that they trade at low prices compared to their historic averages.

In such cases, there may be wide margins of safety on offer that can ultimately translate into strong capital growth in the coming years. Certainly, the near-term prospects for many businesses are challenging. But, in a number of cases, these risks appear to be adequately priced in from a long-term standpoint. This could mean that now’s the right time to build a diverse portfolio of undervalued shares that has significant capital return potential.

Outperforming the FTSE 100

Buying cheap UK shares today could lead to higher returns than those offered by the lead index over the long run. Although the FTSE 100 is often viewed as an index that has offered poor returns, it has delivered an annualised total return of around 8% since its inception in 1984. This is significantly higher than the returns of other mainstream assets. It’s also roughly in line with the performance of other large-cap indexes across the world.

Certainly, much of those gains have been from the reinvestment of dividends. However, with many shares currently offering high yields, the index’s future may be more positive than many investors currently believe. Therefore, it may be reasonable to assume it can continue to offer total returns that are in the high single digits on an annualised basis.

Through buying a selection of cheap UK shares today, you could benefit from the stock market’s recovery prospects. It has always posted new record highs following its downturns. This suggests a similar outcome is likely to take place following the current crisis. As with any asset, buying at a cheap price can be advantageous when it comes to long-term returns.

With many large- and mid-cap shares currently trading on low valuations, now could be the right time to start buying high-quality companies that are undervalued by investors after the recent stock market crash.

The post £10k to invest? I think buying cheap UK shares today could help you beat the FTSE 100 appeared first on The Motley Fool UK.

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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.

Motley Fool UK 2020