Today may seem to be a risky time to open an ISA and buy cheap UK shares. After all, political and economic risks are at high levels. This could cause a period of high volatility for FTSE 100 and FTSE 250 shares.
However, those risks mean that many high-quality companies trade at low prices. Investors may be able to obtain market-beating returns that improve their prospects of retiring early.
As such, now could be the right time for an investor with a long time horizon, such as someone aged 40, to open an ISA and start buying a selection of British shares.
Opening a Stocks and Shares ISA to buy cheap UK shares
A Stocks and Shares ISA is a logical way to buy cheap UK shares. The main reason for this is that no tax is levied on any investments made within it. As such, no capital gains tax or dividend tax is paid by an ISA investor. Over time, this may lead to higher returns versus other accounts, such as a bog-standard share-dealing account, where tax is paid on gains and dividends above the annual allowances.
Furthermore, an ISA provides an investor with a low-cost and flexible means of accessing the long-term return prospects of the FTSE 100 and FTSE 250. The annual administration charges of an ISA are often lower than those of other retirement accounts such as a SIPP. An ISA also allows withdrawals at any time without penalty. This may make them more attractive to someone who still has many years left until they wish to retire.
Investing money after the stock market crash
Cheap UK shares could offer significant return prospects in the long run. Certainly, they face significant risks in the coming months. The ongoing coronavirus pandemic and Brexit are just two risks that could negatively impact on investor sentiment and FTSE 100 and FTSE 250 share prices. Alongside other threats, they could cause a fall in share prices in the short run.
However, such risks could create opportunities for investors because they mean that today’s stock prices include margins of safety. For example, the FTSE 100 trades over 20% down on its 2020 starting price. Many of its incumbents have low valuations relative to their historic levels. This could signify that there is a large amount of capital appreciation potential on offer.
Through buying a diverse range of cheap UK shares and holding them for the long run, an investor could build a surprisingly large ISA portfolio. For example, investing £500 per month from age 40 until age 65 at the FTSE 100’s historic annual return of 8% could produce a portfolio valued at £480,000. From this, an investor could draw a passive income so that they are able to retire prior to getting the State Pension.