The chart that shows how you can get 30pc returns

Investing in the UK stock market when shares have been at their cheapest over the past 30 years would have led to annual returns of more than 30pc, according to data calculated for Telegraph Money.

There are widespread concerns that shares have become overpriced. Last month’s drop in global markets was seen by many as a healthy correction, but share prices are not far from record levels.

The American S&P 500 index is already back at the same levels as the start of 2018, while the FTSE 100 index of leading companies has recovered to its April 2017 level.

The price investors pay for shares is a major determining factor in the returns they will receive, particularly for long-term holders.

The chart ( right) shows that over the past 30 years, investing in the UK market when shares are cheap, and holding them for 10 years, has tended to result in much higher returns than investing when the market is expensive.

The data takes the valuation of the UK stock market (represented by the MSCI UK index) at the end of every month since 1988.

Each dot shows the annual return an investor would have received if they had invested in the index at that point and held the investment for 10 years.

The further left on the chart a dot is, the cheaper the valuation. The higher up the chart a dot is, the greater the annual return over that 10-year period.

The valuation measure is based on a price-to-earnings (p/e) ratio, which compares share prices to the earnings of those companies over 12 months. The higher the figure, the more expensive the market. At present, the UK’s projected p/e ratio ratio of the market was less than 10. The ability of valuation to predict returns is at its most powerful over long time periods. If the investment period in the analysis is dropped from 10 years to just one year, the trend is much less clear, with both cheap and expensive starting points leading to significant losses.

Mike Bell, of JP Morgan Asset Management, the fund manager, said: “Starting valuations are not a good predictor of returns over the next year. The outlook for the economy and company profits matters far more in the short term.

“The longer your investment horizon, though, the more useful valuations are for predicting future returns.”

The data also show that in every example over the past 30 years, when UK shares have been valued at the same level as they are today, they have gone on to deliver a positive return over the following 10 years.

Overall, investors would have only lost money in 2pc of these 10-year periods since 1988.

This valuation method shows when to invest to get the highest returns, writes James Connington There are concerns markets are overpriced