The recent stock market correction sent many FTSE 100 shares firmly in the wrong direction. But with the economic outlook improving in recent months, a recovery might now be fully under way. And that means oversold companies could be on track for a big comeback as confidence returns to the markets.
Therefore, 2024 could be an exceptional year. And capitalising on the big buying opportunities right now might be the critical move to unlock spectacular returns, perhaps even trebling the value of a portfolio.
Cheap shares can lead to big returns
Buying undervalued businesses is a proven investment strategy that’s enabled investors like Warren Buffett to establish impressive fortunes.
Looking throughout history, some of the best times to start snapping up shares have been right after a major correction or crash. Why? Because the subsequent bull market often elevates valuations of top-notch stocks to new heights, building a lot of wealth in the process.
In many cases, shares get sold off by overly pessimistic investors who are concerned about near-term threats such as economic instability or supply chain disruptions. These can obviously have a serious impact on operations. And in some cases, thriving companies can grind to a halt, potentially even cutting dividends to retain capital when weathering the storm.
But for long-term investors, this short-sightedness is exactly how terrific buying opportunities are created. Economic disruption is obviously less than ideal. But a high-quality business will more likely than not find a way to persevere and adapt. And once conditions improve, a depressed valuation can experience a sharp upward correction, delivering double- or even triple-digit returns within just a few years.
Focus on the company, not the stock
The share price is supposed to reflect the value of the underlying business. However, in reality, this is only true in the long run. In the short term, valuations are driven almost entirely by market sentiment, which makes them a poor proxy for what’s actually going on behind the scenes of each business.
Homing in on a firm’s financial strength, competitive position and long-term potential are key for finding winners. After all, there are plenty of cheap-looking shares trading at low multiples for a good reason.
But even after identifying a top company, the status quo might end up changing before a recovery has had time to complete. This is where diversification plays an important role.
Even today’s best firms can be disrupted. And, consequently, a seemingly solid investment may fail to deliver on expectations. That’s why owning a range of top-notch companies can be a powerful strategy. Should one fail, the success of other positions can offset the losses.
Trebling a portfolio
Historically, the FTSE 100 has delivered an average annual return of around 8%. At this rate, an investor could treble their money within 14 years. But by capitalising on cheap individual shares today, this could significantly speed up.
Of course, there are never any guarantees. Future crashes and corrections could temporarily derail progress, and investors may end up having to wait longer to hit their financial goals. Nevertheless, despite the risks, investing remains one of the best ways to build wealth, in my opinion.
