The rising popularity of Bitcoin and tech stocks may leave many investors doubting whether cheap UK shares can deliver high returns. After all, in many cases they are priced at low levels because of near-term threats to their financial performances.
However, history shows that no asset price ever moves up in perpetuity. Therefore, now could be the right time to avoid the virtual currency and overvalued technology companies in favour of undervalued FTSE 350 shares. They may offer less risk and higher long-term reward prospects due to their lower valuations.
Buying cheap UK shares for the long run
A strategy of buying cheap UK shares has generally been successful in the past. For example, look at investors who purchased companies while they traded at low prices following the tech bubble and the global financial crisis. They are likely to have benefited from their subsequent recoveries. While a similar outcome may seem unlikely for companies that face tough operating conditions at the present time, an economic recovery is likely to take place in the coming years.
As such, stocks such as WPP, Standard Life Aberdeen and Taylor Wimpey could provide impressive total returns in the long run. All three companies have suffered from the impact of coronavirus on the economy. However, they appear to have the right strategies and the financial strength required to survive. Furthermore, their share price declines over the past year suggest that they now offer good value for money on a relative basis. This may translate into high returns as the economy mounts a recovery from its present challenges.
Building a diverse portfolio
Of course, cheap UK shares can be priced at low levels for good reason. They may, for example, have weak financial positions or lack a competitive advantage. As such, it is important to try and weed out unattractive businesses through analysing their balance sheets, market positions and strategies in order to invest in the most attractive companies.
Furthermore, the future is always uncertain. Therefore, even the most appealing stocks can experience more challenging operating conditions than expected. This increases the appeal of a diverse portfolio, versus a concentrated one, since it means less risk and potentially higher returns. Many companies can benefit from a long-term economic recovery. However, they must survive the short term before they can deliver a turnaround.
Avoiding Bitcoin and tech stocks
While cheap UK shares could deliver high long-term returns, the prospects for today’s popular assets may be less appealing. Tech stocks may have excellent business models and sound financial prospects, but buying any asset at a high price can equate to a poor investment. Similarly, Bitcoin’s track record shows that price rises can be followed by disappointing performances should investor sentiment change.
Therefore, now could be the right time to buy undervalued shares in high-quality companies. Their fundamentals suggest that in many cases they offer high long-term return prospects as the economy recovers.