The current stock market rally has lifted the prices of many FTSE 100 and FTSE 250 shares. However, it’s still possible to buy a wide range of dirt-cheap UK shares that could make strong gains in 2021 and in the coming years.
As such, an investor aged 40 who has no retirement savings may be able to generate impressive returns over the long run. In doing so, they could benefit from a likely rise in the stock market to new record highs as it recovers from the 2020 stock market crash.
Identifying the best dirt-cheap UK shares
Deciding which dirt-cheap UK shares to buy in this stock market rally could be a crucial decision in determining an investor’s future financial prospects. Some companies may prove to be value traps. In other words, they trade at cheap prices for good reason.
This could be because they have weak financial positions or a poor strategy that’s unable to adapt to fast-paced economic changes. Either way, they may not deliver share price growth in a stock market recovery over the coming years.
As such, identifying solid businesses with valuations that don’t take into account their recovery potential could be a shrewd move. For example, companies such as GSK, Barclays, Taylor Wimpey and Tesco currently trade on valuations that appear to be relatively attractive. They’ve all made improvements to their strategies, financial situations and competitive positions over recent years. And that may mean they can outperform the FTSE 100 in the coming years.
Beating the FTSE 100 in a stock market rally
Dirt-cheap UK shares could outperform the FTSE 100 in a long-term stock market recovery. Investors who’ve purchased high-quality businesses while they trade at low prices have historically generated impressive returns. After all, buying any asset for considerably less than it is worth opens up greater potential for capital appreciation in a subsequent recovery.
For example, a diverse portfolio of cheap shares is likely to have had greater capital appreciation potential. Certainly after bear markets such as the 1987 crash, the dot com bubble and the global financial crisis. And, while stock markets have made gains of late, there are opportunities to follow a similar strategy today.
Investing today from a standing start
Investors who’ve no retirement savings could benefit from buying dirt-cheap UK shares today. If they’ve a long-term outlook, they may experience gains resulting from a likely long-term stock market rally.
Even if they only match the returns of the wider stock market, a regular investment could add up to a surprisingly large portfolio in the long run. For example, investing £250 per month at the same rate as the FTSE 100’s 8% past annual returns would produce a portfolio valued at almost £240,000 within 25 years. This could make a real difference to an investor’s retirement outlook.