Buying cheap UK shares today to make a million may sound like an unlikely idea to many investors. After all, the stock market crash took place only a matter of months ago and the prospects for the economy continue to be very uncertain.
However, today’s undervalued stocks could deliver impressive returns in the long run. As such following billionaire investor Warren Buffett’s lead and buying them could be a sound move for an investor aged 40, or who has a long time horizon.
Identifying the best cheap UK shares
Of course, not all cheap UK shares will deliver long-term capital appreciation. Some companies may struggle to survive what could prove to be a continued tough economic outlook as lockdown measures negatively impact on a wide range of industries.
As such, following Buffett’s lead and buying high-quality companies could be a sound move. For example, they may have competitive advantages that enable them to deliver stronger profit performances than their peers. Or they could have stronger financial positions that mean they are more likely to capitalise on an economic recovery.
Through buying cheap UK shares in companies that have recovery potential, an investor could generate surprisingly high returns in the long run. Such a strategy has been successful for value investors such as Buffett in previous years.
He has significantly outperformed the stock market over a consistent time period. With the stock market crash causing a number of attractive businesses to trade at low prices, now could be the right time to follow a similar plan.
Investing for retirement with a long time horizon
Of course, buying cheap UK shares may not produce impressive returns in the short run. However, an investor with no retirement savings at age 40 is likely to have sufficient time to experience a strong market recovery.
Even though the stock market has experienced numerous declines in its history, it has delivered an annualised total return of around 8%. Assuming that rate of growth on a £250 weekly investment over a 25-year time period would produce a portfolio valued at over £1m.
As such, someone aged 40 with no retirement savings, or who has 25 years left until retirement, could realistically obtain a seven-figure retirement portfolio.
Of course, not everyone has £250 per week to invest in cheap UK shares. However, the example shows that regularly investing money in FTSE 100 and FTSE 250 shares can lead to a surprisingly large nest egg over the long run.
With the stock market crash having caused many high-quality businesses to trade at low prices, there may be opportunities to beat the wider market’s growth rate in the coming years.
This could allow an investor to follow in Buffett’s footsteps and improve their financial situation in the long run.