The 2020 stock market crash means there are plenty of cheap UK shares available to buy today. Despite this, the recent decline of stock market indexes such as the FTSE 100 and FTSE 250 may cause some investors to seek safer opportunities elsewhere.
However, the return potential of the stock market suggests it may be a worthwhile means of building a retirement nest egg for anyone aged 40, or who has a long time horizon.
As such, now could be the right time to start buying undervalued British shares. Doing so through a tax-efficient account such as a Stocks and Shares ISA may lead to even more attractive returns in the coming years.
Compound returns from cheap UK shares
The return potential of cheap UK shares may not currently be evident. After all, the recent stock market crash means that indexes such as the FTSE 100 are trading more than 20% down year-to-date.
However, the past performance of the stock market shows that it can produce impressive returns over the long run. For example, the FTSE 250 has delivered an annualised total return of around 8% in the past 20 years. An investor who buys £10,000 of shares today and holds them for 25 years could have a nest egg of £73,000, assuming the same rate of return is achieved.
Similarly, investing in cheap UK shares on a regular basis can lead to a surprisingly large portfolio. Assuming the same 8% return on a £200 monthly investment could produce a portfolio valued at £191,000 over a 25-year time period.
Purchasing shares after the stock market crash
Of course, the stock market crash means that many cheap UK shares could offer market-beating returns in the coming years. Weak investor sentiment due to a tough economic outlook means that many companies currently trade at low price levels that may not account for their long-term growth prospects.
Therefore, now could prove to be an opportune moment to start building a retirement portfolio. A simple way of doing so is to open a tax-efficient account such as a Stocks and Shares ISA. It is straightforward to open online and cheap to administer. This makes it open to almost anyone who wishes to purchase a diverse range of shares. An ISA also provides greater flexibility in terms of when withdrawals can be made compared to other products such as a SIPP.
Certainly, cheap UK shares could move even lower in price in the short run. The stock market’s volatility may remain high as a result of threats such as Brexit and the coronavirus pandemic. However, an investor aged 40, or who has a long time horizon, is likely to benefit from the return potential offered by the stock market. This could allow them to retire in comfort on a generous passive income.