A plan to invest £20k in shares in an ISA today could produce surprisingly high returns in the long run. After all, many FTSE 100 and FTSE 250 shares trade at cheap prices that could rise significantly over the coming years.
Furthermore, the long-term growth potential of the world economy seems to be high. It has a solid track record of delivering impressive recoveries after its declines.
As such, an ISA portfolio that includes a diverse range of UK shares could provide financial freedom in the long run.
Aiming to invest £20k in shares in an ISA at cheap prices
Despite the recent stock market rally, it’s still possible to invest £20k in shares that trade at cheap prices. The UK’s economic outlook continues to be relatively challenging on a short-term outlook. For example, Brexit could cause uncertainty in the near term that leads investor sentiment to weaken.
Meanwhile, coronavirus is likely to remain a part of our lives for some time. This may impact on consumer confidence and demand for a wide range of goods and services.
These risks mean many sectors remain unpopular among investors. Companies within them trade at significant discounts to their intrinsic values, in many cases. Investors may be factoring in weak operating conditions over the long run that ultimately don’t materialise, as an economic slowdown is likely to give way to growth.
A solid track record of stock market recoveries
A plan to invest £20k in shares at low prices has been successful in the past. Previous bear markets such as the 1987 crash and the global financial crisis caused even greater falls in the FTSE 100 than has been the case so far in 2020. Yet, the stock market recovered to post gains that allowed cheap stocks to deliver impressive returns.
Certainly, on both of those occasions there were false starts, ongoing uncertainties and periods where companies really struggled to post profit growth. However, ISA investors who purchased a diverse range of cheap stocks are likely to have benefitted the most from a stock market rally. After all, cheap assets start from a lower base than expensive ones. They can deliver the greatest capital appreciation as investor sentiment improves.
Achieving financial freedom from buying shares in an ISA
Achieving financial freedom from a strategy to invest £20k in shares through an ISA today could be a realistic goal. For example, assuming the same return as the FTSE 100’s past performance of 8% per annum would turn a £20k investment into almost £300k over a 35-year timeframe. From this, a £12k (4%) passive income could realistically be drawn to supplement the State Pension in retirement.
Of course, not all investors will have 35 years to grow their investment. However, buying cheap shares and holding them for the long run could produce higher returns than the stock market. This may lead to a larger portfolio value, as well as greater financial freedom.