Investor sentiment towards equity markets has been hugely volatile over recent months. After all, many UK shares have fallen in price because of an uncertain outlook for the world economy caused by coronavirus, political risks and other threats to global growth.
This situation may persist in future. But, over the long run, the low valuations present in the stock market and its track record of recovery could make it a sound place to invest from a risk/reward perspective.
As such, investing £10k, or any other amount, in a diverse range of stocks could be a logical move.
Investment appeal among UK shares
Low valuations available across the UK stock market indicate that investing money in shares could be a worthwhile move from a risk/reward perspective. Their wide margins of safety may mean they offer scope for capital growth over the long run.
Furthermore, the stock market and global economy have always recovered from their challenging periods. And they’ve gone on to post new record highs and recoveries. While this outcome cannot be guaranteed at the present time, a long-term time horizon may provide sufficient scope for it to take place. This could mean that today’s undervalued UK shares produce impressive returns.
A focus on quality
As mentioned, UK shares face an uncertain future. Therefore, it could be a good idea to diversify and focus on high-quality companies. Clearly, this won’t eliminate risks. But it could reduce them to provide higher returns in the long run. Certainly as a potential economic and stock market recovery take place following the 2020 stock market crash.
Focusing on quality is likely to mean different things to different investors. However, it may include things such as assessing the financial strength of a business through analysing its balance sheet and cash flow. A company that has low debt levels and strong cash flow may be less likely to experience severe financial challenges that threaten its existence.
Similarly, businesses that have competitive advantages versus other UK shares may be better able to cope with periods of weak operating performance. They may also strengthen their market positions at the expense of weaker peers.
Managing risks
Of course, investing in UK shares, even at today’s relatively cheap prices, carries significant risks for investors. For example, the economic outlook for the UK and globally continues to be very uncertain. This may mean investors experience losses in future, while there’s no guarantee of a recovery from today’s low prices.
However, by taking a long-term view and holding businesses that have solid financial positions and competitive advantages, it may be possible to generate improving returns in the coming years. As such, now could be an opportune moment to buy a diverse range of undervalued UK stocks for the long term.
