Investing consistently in cheap UK shares with an ISA can end up building quite a significant amount of wealth. Even for individuals with next-to-no savings, small monthly contributions can generate quite a handsome nest egg for retirement. And, believe it or not, a portfolio could venture into millionaire territory for those with patience.
Buying and holdings cheap UK shares
Since the start of 2022, the FTSE 250 has dropped by over 20%. And it could take some time before the current downward trajectory reverses. After all, companies are in the middle of figuring out how to overcome the hurdles of operating in an inflationary environment while simultaneously tackling higher interest rates.
This undoubtedly creates short-term growth disruption and sets the stage for potential margin erosion. However, plenty of proven high-quality businesses have enough resources on their balance sheets to weather this storm. That’s why investors with capital to spare today are actually in quite an enviable position.
Typically, finding cheap shares on the UK stock market can be quite a challenge, requiring lots of corporate valuation knowledge. But thanks to the ongoing correction and record low investor sentiment, finding value opportunities to invest in today is far easier than normal. And in my experience, buying a selection of fantastic undervalued businesses is a recipe for achieving above-average returns in the long run.
Investing consistently to £1m
Going down the route of picking a selection of individual stocks rather than opting for an exchange-traded fund does come with a caveat. On the one hand, it opens the door to more substantial returns, provided I execute quality research and mental discipline. On the other hand, it also means the likelihood of underperforming goes up as well. It’s a higher-risk, higher-reward strategy.
Over the last couple of decades, the FTSE 100 has delivered an average annual return of around 8%. With the bargains available today, outperforming this benchmark should be perfectly possible. And even if my portfolio generates just an extra 3% annual return, it can work wonders in building long-term wealth.
Let’s say I’m in a fortunate position where I can spare £600 from my monthly salary (the equivalent of £150 a week) to invest in shares. Even if I were starting from scratch, at an 11% average return, my portfolio would cross the £1m threshold in 26 years.
That, of course, assumes everything goes according to plan, which, as I know, isn’t always the case. Even more so when it comes to picking individual stocks. But while index funds do offer a lower-risk approach to investing, the time required to reach millionaire status is much higher. In fact, the same portfolio would take six years longer to hit the same goal.
That’s why, personally, I think the increased risk is well worth the potential reward.