Investing £250 per month in cheap UK shares may produce a portfolio valued at over £1m faster than many investors realise.
Certainly, obtaining a similar return to that of the FTSE 100 means it could take an extended period of time. For example, the index has delivered total returns of 8% since its inception in 1984. Assuming that rate of return on your £250 monthly investment means it would take around 42 years to achieve seven-figure status.
However, by investing in undervalued stocks after the market crash, you could obtain a higher long-term return. This could make the prospect of making a million more attainable for a wider range of investors.
Cheap UK shares with recovery potential
Cheap UK shares could experience further falls in their prices in the short run. But over the long term their recovery potential is high. The stock market has always delivered a successful comeback from its previous crashes to produce new record highs. Therefore, buying undervalued companies when other investors are cautious about their prospects could be a sound strategy to adopt at the present time.
Some companies are currently trading on valuations significantly lower than their historic averages. This suggests investors may have priced in their potential to experience challenging performances in the coming months. Their wide margins of safety may lead to more impressive capital returns over the long run.
Buying sound businesses
Of course, simply buying a selection of cheap UK shares today and holding them for the long run is unlikely to be the best means of making a million. The economy faces a hugely challenging outlook that could be negatively impacted by factors such as coronavirus and Brexit. Therefore, it’s crucial for investors to analyse the financial position of companies before buying them.
For example, businesses that have high debt levels may struggle to survive a period of lower sales. Similarly, companies that lack investment capital may be unable to adapt their business models to a fast-changing economy. They may be left behind by technological change and evolving consumer tastes that seem to be moving ahead at a faster speed at the present time. Therefore, identifying financially-sound businesses that can adapt to an unknown future could be key to generating market-beating returns.
Using a Stocks and Shares ISA
Buying cheap UK shares can be even more profitable for those investors who use a tax-efficient account such as a Stocks and Shares ISA. Capital gains tax or dividend tax is not charged on amounts invested through an ISA. Wider tax rises are apparently ahead. This could mean that your net returns are significantly higher versus using a bog-standard share-dealing account.
This could further improve your returns relative to those of the wider market, and reduce how long it takes to make a million.