Buying cheap UK shares today and holding them over the long run could prove to be a profitable strategy. The past performance of the stock market and the economy suggests a recovery from present challenges is likely to take place in the coming years.
As such, through using a tax-efficient account such as a Stocks and Shares ISA, it may be possible to capitalise on the growth prospects of a number of companies and sectors.
Cheap UK shares could deliver growth in the long run
Purchasing any asset at a lower price, rather than a higher price, could mean there’s greater scope for capital growth. In the case of cheap UK shares, they may be able to benefit to a greater extent than their index peers from a stock market recovery that lifts investor expectations about their future performance.
Such a strategy has been successful in the past. For example, investors who purchased a diverse range of FTSE 100 shares following the global financial crisis in 2009 are likely to have benefitted from the doubling in price of the index in the following years.
Similarly, buying stocks after the 1987 crash and the dot com bubble’s bursting, when they traded at low prices in many cases, could have provided scope for capital growth that’s above the stock market’s long-term average.
A long-term investment horizon
Of course, it can take many years for today’s cheap UK shares to produce high returns. The economy’s outlook is very uncertain at the present time. So this could mean many industries face tough operating conditions for a prolonged period of time.
As such, it may be a shrewd move to take a long-term view of any UK stocks purchased at the present time. In the coming months, they may experience further challenges as the cost of the coronavirus pandemic becomes clearer. This could lead to paper losses, or negative returns, for investors that take time from which to recover.
History suggests investors who have a long time horizon have been able to overcome short-term volatility to benefit from the stock market’s high single-digit annual total returns.
Investing in a tax-efficient manner via an ISA
Due to some UK shares currently trading at cheap prices, it could be a sound move to buy them in a tax-efficient account such as an ISA. Investments made through an ISA are exempt from tax, including capital gains tax and dividend tax.
This could lead to higher net returns for an investor should the stock market continue its long-term trend to produce capital growth and dividends that are relatively attractive.
Through building a diverse ISA portfolio of cheap stocks today, it may be possible to obtain a surprisingly large nest egg over the long term. Although risks are high, and volatility is likely, equity markets could deliver growth in the coming years that lifts the prices of today’s undervalued shares.