Buying a diverse range of high-quality value shares could be a sound means of generating a portfolio valued in excess of a million.
The post Here’s how I’d invest in value shares to make a million appeared first on The Motley Fool Australia. –
Value shares have been relatively unpopular for much of the last year. Investors have instead focused on companies that could deliver high earnings growth in what is expected to be a changed global economy post-coronavirus.
As such, there may be buying opportunities among cheap shares in high-quality businesses. Through purchasing a wide range of them now and holding them for the long run, it may be possible to obtain index-beating returns that increase an investor’s chances of making a million.
Buying high-quality stocks at cheap prices
There is a great difference between cheap shares and value shares. The former are simply companies that trade at very low prices. In some cases, they can offer good value for money if, for example, they are a high-quality business with a solid financial position and large competitive advantage. However, in other cases they may be trading at a cheap price because they lack those attributes, or because they face difficult operating conditions in the long run.
Therefore, it is important to assess the quality of a business before buying it. Clearly, this will be very subjective. But it is likely to include consideration of a company’s balance sheet, strategy and market position relative to competitors to deduce whether a company offers good value for money at its current price. All of these factors can have a large influence on its capacity to deliver improving profitability. As such, ensuring they are in place before purchase could be a means of reducing overall risks and improving potential rewards.
Building a portfolio of value shares
Many value shares are priced at attractive price levels because they face temporary challenges. For example, at the present time they may face disruption from coronavirus lockdown restrictions that are unlikely to last in perpetuity.
However, those threats can sometimes cause the downfall of a business. For example, they may be unable to adapt to a changing world economy in the long run, or new technology may make their products obsolete. This means there is a real threat that any value stock can lose money for investors, or even fold. This makes it extremely important to build a diverse portfolio of stocks that, together, can provide a high overall return. Otherwise, it is possible to have a portfolio that is overly concentrated and susceptible to poor returns from a small number of holdings.
Making a million
An investor who buys a diverse portfolio of shares to match the return of the wider stock market could realistically make a million in the long run. For example, investing $750 per month at an 8% annual return would produce a portfolio valued at over $1m within 30 years.
However, through buying value shares it is possible to outperform the stock market. This could help to bring a £1m portfolio in a shorter timeframe as the world economy and stock market recover.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
- Why the LiveTiles (ASX:LVT) share price is surging 17% higher today
- Why is the European Metals (ASX:EMH) share price 12% higher today?
- Amazon (NASDAQ: AMZN) shares rise despite Bezos resignation
- Shares in Core Lithium (ASX:CXO) enter voluntary suspension
- Why the Virgin Money UK (ASX:VUK) share price is surging 13% higher
Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
The post Here’s how I’d invest in value shares to make a million appeared first on The Motley Fool Australia.