Since the start of 2022, the stock market has been on quite a downward trajectory to the point where many UK shares are starting to look cheap. For brave and prudent investors, this presents a rare opportunity to build substantial long-term wealth. And reaching a million pounds could be on the table, even for those with only £200 a month to spare.
How? Let me explain.
Reaching a million with cheap UK shares
Historically, the FTSE 100 has generated an average return of around 8%, including the income from dividends. With a monthly investment of £200 into an index tracker at this level of return, entering millionaire territory isn’t all that difficult.
The problem is that the compounding process will theoretically take about 45 years, if I start from scratch. And in practice, since multiple future stock price corrections and crashes are inevitable, I could be waiting even longer before hitting a million pounds.
That’s where cheap UK shares come into the picture. With uncertainty and investor fear near record highs, many fantastic businesses currently trade at significant discounts to their intrinsic value. In simplified terms, there are amazing buying opportunities available for my portfolio right now. And if I can successfully identify these opportunities, achieving a market-beating average return of around 12% should be more than achievable.
A 4% performance difference doesn’t sound like much. But in terms of building a million-pound portfolio, it slices 12 years off the waiting time. And, best of all, by using a Stocks and Shares ISA, none of these gains end up lining the taxman’s pockets.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Nothing is risk-free
As 2022 has perfectly demonstrated, investing in UK shares can be quite a volatile experience. And for investors that decide to pick individual stocks in the pursuit of higher returns, the risks are even higher, especially if a portfolio isn’t correctly diversified.
Looking back through history, the stock market has a perfect track record of recovering from corrections before reaching new heights. However, that doesn’t mean every business will make it. The pandemic has undeniably decimated multiple industries. And in some cases, may have signed the death warrants of companies that are still limping on today.
In other words, many cheap-looking UK shares could be priced that way for a good reason. A firm with a P/E ratio in the single digits may end up being a trap rather than an opportunity. Needless to say, investing in such stocks will most likely make my capital evaporate rather than multiply.
So how can I spot which companies are worthy of investment and avoid the duds? This is where detailed research is needed. Understanding the threats to a business, its financial health, managerial expertise, and competitive advantages is critical in finding the best cheap UK shares to buy now.