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Investing in the best shares to buy on the London Stock Exchange is one of many paths to achieving financial freedom. However, if investors don’t tread carefully when searching for these opportunities, it’s easy to trip and wipe out a lot of wealth in the process.
When looking at the FTSE 100, the UK stock market has historically delivered high single-digit average returns each year. Given enough time, compounding can easily transform a £500 monthly investment into a seven-figure portfolio at this rate.
However, not everyone has three decades to spare. So what can investors do to achieve financial freedom on a shorter time horizon? The easiest solution is to just inject more capital each month. In fact, doubling the contributions can shave off eight years.
Sadly, not everyone has the luxury of comfortably sparing a grand each month. And that’s where stock picking enters the picture.
Finding the best shares
For those trying to beat the market, stock picking is a necessity. There’s no denying it comes with more risk. But if an investor can muster an average annual return of just 12% instead of the FTSE 100’s 8% average, that will have the same impact as doubling the monthly contributions.
Of course, targeting a 12% return and actually achieving it are very different things. Investors need to be capable of identifying the best shares to buy, which is no easy feat. And while The Motley Fool has written a free stock-picking guide, the first step is working out where to start looking.
In my experience, the best investments are often hidden in places where most investors aren’t paying attention. And therefore a prudent way to start the search for bargains is scouring through industries and sectors that aren’t fashionable right now.
One example today would potentially be real estate. With interest rates driving up the cost of servicing mortgages, property prices have steadily declined over the last 12 months. So it’s no surprise that the share prices of real estate investment trusts (REITs) have followed suit.
However, for many of these businesses, the rents keep flowing. And some have even successfully started hiking rental prices, bolstering their cash flows. That’s certainly a characteristic of a potential buying opportunity.
There are risks
The real estate sector is far from the only stock market segment with bargain-buying opportunities. However, even if an investor successfully identifies strong shares to buy now, that still doesn’t guarantee market-beating returns.
It’s important to remember that internal and external forces can disrupt businesses. And it’s usually the latter that causes the most problems as often there’s limited recourse available. Just take a look at what happened with travel stocks during the height of the pandemic.
When it comes to investing, risk is inevitable. However, it can be managed by deploying simple mitigation strategies like diversification. By owning a variety of top-notch stocks across different industries, the impact of disruption of a single position in a portfolio can be significantly reduced.
