In the recent market weakness, the FTSE-focused index tracker funds in my portfolio have been standing up well, relative to some other investments. And I reckon that augurs well for the potential of UK shares from where we are now.
Valuation matters
For example, my tracker investments following the US market have fallen further than my FTSE trackers. And I reckon there’s a good reason for that — valuation. The US stock market has tended to accommodate much higher valuations than the UK market for many years. And that’s often occurred because of higher growth rates in the underlying businesses. But not always. Sometimes, speculation alone has driven prices higher.
So it’s perhaps unsurprising that US stocks on high ratings have fallen a long way recently when the mood music changed. And UK stocks, in many cases, have seen modest falls by comparison. Although some UK stocks have given up a lot of ground, for sure.
Nevertheless, before the latest bout of market wobbles, many investors on both sides of the Atlantic were touting the London stock market as an attractive place to invest. And the main reason for that was the lower valuations on offer.
But let’s not forget that lots of UK stocks are backed by solid, high-quality businesses. There may be a shortage of high-growth, whizzy-dizzy technology businesses in London. However, there are many enterprises that are well worth my consideration now.
But as well as choosing individual shares, I’m continuing to invest in my tracker funds following the UK stock market. If history repeats — which it may — an investment in ‘the market’ like that could pay off in the coming years.
The FTSE 100’s strong performance
The FTSE 100 index started in 1984. And according to analyst Sam Dickens of financial services company IG, it rose by 654% in price between 1984 and 2019. But the total returns including dividends were 1,377% over the period. And that works out as an annualised total return of 7.8%.
Of course, a similar outcome over the next 35 years is not guaranteed. But an annualised return of almost 8% is attractive to me. And that’s why I reckon UK shares can make a useful component of a strategy aimed at helping me to fund an early retirement.
There are many ways to tackle the process of investing. And many can be successful over time. But my own method involves investing regularly in a range of low-cost tracker funds alongside some managed investment trusts. But in the pursuit of higher annual returns, I also invest in the shares of individual companies after careful research and selection.
My aim is to diversify by investment vehicle, geography, sector and business. Although there’s no guarantee of a positive long-term outcome for me, I see UK shares as an important component of the strategy.