Investing £10k, or any other amount, in crashing UK shares today may not necessarily produce high returns in the short run. A number of risks face investors, such as a continued rise in coronavirus cases.
Therefore, taking a long-term view is likely to be very beneficial to investors seeking to generate high returns.
Similarly, investing in a diverse range of high-quality businesses could further reduce your overall risks. It may also boost your return prospects, and allow you to enjoy a likely recovery in stock prices in the coming years.
A long-term focus
The near-term prospects for UK shares are very uncertain at the present time. As well as the ongoing threat of a second wave of coronavirus, Brexit continues to cause a degree of caution among investors. This may lead to weaker investor sentiment in the coming months that causes paper losses for many investors.
Therefore, investing in stocks after the recent market crash may require a long-term standpoint. The outlook for many stocks may deteriorate further before it improves. As such, investors seeking to capitalise on the cheap valuations on offer across many sectors may wish to afford their holdings sufficient time to produce a recovery.
High-quality UK shares
Many UK shares have produced impressive returns in the past decade without necessarily having solid finances or sound business models. In some cases, they have been buoyed by a strong economic tailwind that has covered for their financial weakness or lack of economic moat.
However, the uncertain economic outlook means that high-quality businesses may now become more attractive relative to their weaker peers. Through investing in companies with solid balance sheets and a competitive advantage, investors can reduce their risks and improve their long-term return prospects.
In an era when sales and profit growth may become increasingly difficult to achieve, UK shares with modest debt levels and a strong market position may produce the best returns for investors. Therefore, focusing your capital on them now could prove to be a shrewd move.
Diversification
With the outlook for many UK shares being very uncertain at the present time, it is crucial to diversify among a wide range of businesses. Not only does this improve your spread among a range of sectors that may experience vastly different outlooks due to coronavirus, it also means that you have exposure to varied geographies. This may reduce your overall risks as a result of coronavirus potentially impacting different countries with varying degree of severity.
Although diversification does not remove risk entirely, it may reduce your reliance on a small number of stocks. Over the long run, this could allow you to experience more resilient gains that have a higher chance of producing an improved financial position as the stock market recovers.