The prospect of buying and holding cheap UK shares in a Stocks and Shares ISA may seem unappealing at the present time. After all, risks such as coronavirus and Brexit may hold back their performance over the coming months.
However, over the long run, undervalued FTSE 100 and FTSE 250 shares could produce impressive returns that boost your financial prospects. They could even improve your retirement prospects – especially compared to other popular assets. As such, now could be the right time to invest £5k, or any other amount, in UK stocks.
An uncertain outlook for UK shares
Of course, Stocks and Shares ISA investors may experience a challenging period over the coming months. Brexit talks are currently unresolved. So the potential for a no deal may mean investor sentiment comes under pressure in the short run. Similarly, the potential for a second wave of coronavirus this winter may mean the financial outlook for many businesses deteriorates versus current expectations.
However, those risks mean many UK shares are now trading at low prices. As such, they could represent a buying opportunity for investors who can look beyond the short run. Instead, they can focus on the potential for capital gains in the coming years. In many cases, the risks facing high-quality businesses may have already been factored in by investors. This could allow them to produce impressive share price recoveries over the long run.
Buying and holding UK shares in a Stocks and Shares ISA
The returns available from buying cheap UK shares in a Stocks and Shares ISA could be surprisingly high over the long run. For example, the stock market has posted an annualised total return of around 8% per year over recent decades. Assuming the same return on a £5,000 investment held for 35 years would lead to a nest egg of around £74,000.
Clearly, the longer the investment horizon, the higher the potential portfolio value at the end. Furthermore, buying a selection of UK shares now while they trade at cheap prices could produce even higher returns than the market’s historic average. They may have superior recovery potential than their peers, which could allow them to deliver higher capital returns as the economy recovers.
Focusing on the stock market
Although it’s tempting to buy other assets such as gold and bonds in your Stocks and Shares ISA at the present time, focusing on UK shares could be a more profitable move. Low interest rates mean bond yields are currently low, while gold’s high price may limit its potential for further gains.
Over time, the stock market has the potential to outperform other mainstream assets. Through buying cheap shares now, you could maximise your returns over the coming years to improve your financial position.