One of the most tried and tested methods of making money with UK shares is to buy them while they’re cheap. That’s good news for investors in 2023 because, right now, plenty of FTSE 100 and FTSE 250 stocks are still trading at low valuations on the back of last year’s correction.
With economic conditions improving thanks to cooling inflation, it may not be long before investors regain optimism within the financial markets. This could help British companies recover from all the recent downward volatility.
And for the firms that have continued to thrive despite the lacklustre stock performance, market-caps may even reach new highs.
Capitalising on a stock market rally
There’s no absolute way of knowing when a rally will occur. It may be weeks or months away. Or it might have just started. Regardless, the best way to profit from such upward momentum is to simply start investing in UK shares.
The easy approach would be to buy shares in a low-cost index fund. This enables investors to emulate leading indices’ performances without much effort or research. It also means that portfolio management and diversification are also taken care of, giving an almost hands-free method of building wealth.
However, picking individual stocks could be the more appropriate method for those seeking to maximise their returns in the eventual market rally. Obviously, this requires far more time and dedication.
Chasing the latest trends and focusing on the most popular stocks is unlikely to yield the greatest results. In fact, overhyped sectors could easily destroy wealth even during a rally.
Instead, investors should focus on isolating proven companies with strong balance sheets and expanding cash flows. Under normal market conditions, these firms usually trade at, or above, their intrinsic value.
But with many investors still making emotionally-driven decisions rather than logical ones, plenty of these firms on the London Stock Exchange are currently underpriced. And snatching up these UK shares before they potentially surge can have a monumentally positive impact on wealth.
The risks that lie ahead
Even if an investor successfully identifies the best businesses at terrific prices, the short-term is still rife with uncertainty. Sudden setbacks in the fight against inflation could trigger another round of panic selling, again sending valuations in the wrong direction.
Stock market rallies are notoriously volatile trading periods. But there are some simple tactics investors can deploy to mitigate this. And one I’ve been using extensively this year is pound-cost-averaging. Instead of throwing all my capital into UK shares all at once, I’ve been spreading my buying activity over several months.
While this does mean I’m paying more for transaction fees, it potentially allows me to capitalise on more buying opportunities. For example, suppose a stock I’ve been buying suffers a sudden downturn despite the underlying business remaining rock-solid. In that case, I now have the opportunity to snatch up even more shares at an even better price.
This post was originally published on Motley Fool
