Turning £1,000 in £20,000 via UK shares may sound like a pipe dream, but I think it’s achievable for a private investor like me. While there’s more than one way to climb the mountain to riches, my strategy is to move away from the best-known stocks and focus more on the minnows.
Why it pays to go small
There are several reasons why smaller companies have historically outperformed their larger market peers.
First, high-quality small-caps can grow revenues and profits at a faster clip. This makes it easier for a company with a market-cap of, say £100m, to double in value. A company like FTSE 100 oil giant Royal Dutch Shell however, will take far longer to double, if it happens at all.
Second, the vast majority of analysts in the City spend their time pouring over the latest figures from the best-known companies on the London Stock Exchange. As a consequence, many promising, junior UK shares rarely appear on their radars. This is clearly a good thing for the nimble private investor since these stocks are more likely to be mispriced.
Third, professional fund managers are often prevented from buying these companies even if they’re aware of how good they are. This underlines the benefits of learning to manage one’s own investments, assuming the time and inclination.
Be warned
Now, let me be clear. Small-cap investing isn’t for everyone. In fact, there are reasons why some people might want to steer clear entirely.
First, share prices can be extremely volatile. This is usually because these stocks tend to be harder to buy or sell quickly. That’s not necessarily a problem when markets are behaving themselves. However, it’s a potential disaster in the event of a market crash. Last year showed it’s possible to lose a great deal of money (at least on paper) in a very short space of time.
This brings me to my second point. To be more confident about getting a great return from small-cap UK shares, patience is required. Again, this might not be a problem for those with decades of their stock market journey left. However, older investors may not be quite so flexible. This is particularly the case if they’re approaching retirement, or have already quit the rat race.
Does this mean it’s impossible to make good money without taking on insane levels of risk? Actually, no. There are ways of mitigating this.
Ways to reduce risk
Aside from ensuring I’m not overly invested in any one company and being extremely wary of ‘penny’ stocks, I also own a number of actively managed funds investing in this space. While the fees are unquestionably high, I believe the eventual return should be worth the expense.
As an example, I’m currently invested in the Liontrust UK Smaller Companies Fund. Managed by Anthony Cross and Julian Fosh, this fund has returned over 1,600% since 1998. Seen from this perspective, multiplying the portion of my capital invested in small-cap UK shares 20-fold in the next 30 years (my personal investing horizon) might actually be possible!
Sure, 2020 showed that the path to riches certainly won’t be without a few setbacks. However, so long as I can steer clear of meddling with my portfolio too often, I’m confident the rewards will be worth it.