Looking back at the history of UK shares reveals that the ongoing volatility plaguing the markets will eventually end. In fact, the stock market has a perfect track record of recovering from even the most severe crashes and corrections before eventually reaching new heights.
The current economic conditions don’t exactly provide the best operating environment for businesses. However, when investing long-term, these issues become merely temporary speed bumps. And as conditions like inflation slowly improve, valuations will likely start lifting, especially when investor confidence returns.
That’s why capitalising on the cheap stock prices before a market rally might be a lucrative decision. And £5,000 invested in high-quality British enterprises today could transform into considerably more within the next couple of years.
Finding the best shares to buy
An economic downturn is temporary, but its effects can be felt for years. Suppose a company has to overleverage itself with debt just to keep the lights on. In that case, it might survive the storm, but the surge in interest expenses would likely decimate earnings. And it could be a long time before the business can thrive again.
That’s why simply buying beaten-down UK shares isn’t likely to yield terrific results. Instead, investors need to focus on cheap companies with robust financials and a realistic strategy.
Firms with the flexibility to adapt to different economic environments can often capitalise on the opportunities created by struggling competitors. And in the long run, when the market rally eventually materialises, that’s a path to industry dominance as well as impressive returns for patient shareholders.
Investing before a rally
Buying UK shares just before the market begins to recover is a pinnacle of “buying low”. It seems like a simple strategy on paper. But in practice, predicting when the market has reached its lowest point is near impossible.
Looking at the FTSE 250, the stock market recovery may have already started. After all, the index is up by nearly 15% since its lowest point in October. If that’s the case, then the window of opportunity to capitalise on cheap valuations may already be closing.
Having said that, this might also be the calm before the storm. With a recession looming over the United Kingdom, the worst may be yet to come. This uncertainty is what’s causing such unease in the stock market today. And it’s possible that buying seemingly outstanding shares now could lead to losses in the short term.
This risk can be partially mitigated by investors with a pound-cost-averaging buying strategy and by ensuring portfolios remain diversified across multiple industries. And while there may be some pain in the near-term, patient shareholders of top-notch businesses could be on track to unlock potentially big long-term gains.
The post Stock market rally: how I’d invest £5,000 in UK shares right now appeared first on The Motley Fool UK.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.