Investing £20k in UK shares today could realistically produce a portfolio valued at £40k within nine years. After all, the FTSE 100 and FTSE 250 have delivered annual total returns of around 8% in the past 20 years. Assuming the same rate of return in future would mean 100% returns are achieved within nine years.
However, it may be possible to beat the stock market’s returns. Many shares are trading at cheap prices that seem to undervalue their long-term growth prospects. Through buying a diverse range of them, an investor could reduce the amount of time it takes to double their money on the stock market.
Investing £20k in UK shares trading at cheap prices
Despite the recent stock market rally, it’s possible to invest £20k in UK shares that trade at cheap prices. Investor sentiment towards a wide range of sectors remains downbeat, with their challenging near-term prospects weighing on valuations.
For example, financial services companies including Aviva and HSBC trade significantly lower than they did at the start of the year. Yet, they have revised strategies that could lead to improving profitability over the long run.
Buying cheap shares has historically been a sound means of generating market-beating returns. For example, investors who purchased FTSE 100 and FTSE 250 shares after the global financial crisis are likely to have benefitted from the stock market’s subsequent recovery.
Similarly, the same approach is likely to have been successful after other notable bear markets, such as the 1987 crash and dot com bubble.
Buying high-quality businesses from across the FTSE 100 and FTSE 250
Clearly, investing £20k in UK shares comes with risks. The economic outlook is uncertain, and could even get worse before it improves. As such, buying a diverse range of companies is perhaps more important than ever.
A broad range of shares in a portfolio means less reliance on a small number of sectors for returns. Over time, this can have a positive impact on an investor’s chances of doubling their money.
Meanwhile, buying high-quality companies could be an important means of outperforming the stock market. Clearly, what makes a business ‘high quality’ is subjective. However, traits such as a solid balance sheet, a wide economic moat and a strategy that provides flexibility in an uncertain economic period are likely to be key ingredients.
Such companies may outperform the stock market – especially when they trade at cheap prices today following the recent stock market crash.
Making 100% over and over again
Of course, investing £20k in UK shares to make a 100% return can lead to a surprisingly large portfolio in the long run. Compounding makes each subsequent 100% return even more valuable in monetary terms.
Even assuming an 8% annual return would mean an investor with a 36-year timeframe has sufficient time for their initial investment to double four times. In doing so, a £20k investment could ultimately be worth £320k.
As such, taking a long-term view and buying high-quality companies at cheap prices could be a sound move.