Making a million is unlikely to be an easy task for any investor. However, investing your spare capital in a Cash ISA could make it a far less realistic goal due to the poor returns which cash has historically offered.
Certainly, interest rates are unlikely to remain at their current low levels in the long run. But, it may require a higher rate of inflation to prompt the Bank of England to move interest rates higher. This may mean that, after inflation has been factored in, the returns on a Cash ISA remain negative.
Therefore, investing in the stock market could prove to be a shrewd move. Although there is far greater volatility and uncertainty compared to a Cash ISA, following these three steps could help to improve your chances of making a million in the long run.
Undervalued stocks
Since the trade dispute between the US and China, as well as Brexit, remain major risks facing the world economy, there are a number of shares that appear to offer good value for money. In fact, the FTSE 100 and FTSE 250 both contain a wide range of companies that trade on valuations that are significantly below their long-term averages, which could suggest they offer wide margins of safety.
While buying shares during uncertain periods may be risky in the short run, history shows that it can deliver high returns in the long run. That’s especially the case with undervalued shares, which could offer relatively favourable risk/reward ratios when compared to the wider index.
International diversity
Since the UK economy faces an uncertain period at the present time, buying a range of companies that operate internationally is likely to be a sound move. Not only could this reduce risk within a portfolio, it may provide access to faster-growing economies across the world. For example, India’s economy is forecast to grow by over 7% this year, which compares favourably to the UK’s forecast growth rate of 1.4%.
Fortunately, it is relatively straightforward for UK investors to diversify geographically. The FTSE 350 generates the majority of its income from international economies, so buying a portfolio of mid and large-cap stocks is likely to provide sufficient diversity during a period of significant change for the UK economy.
Dividend shares
Since the outlook for the stock market could be uncertain, dividend shares could become increasingly valuable. They may offer relatively high total returns should the stock market fail to grow rapidly over the medium term, while stocks that offer robust shareholder payouts may become more popular among increasingly risk-averse investors.
As such, ensuring that your portfolio generates an above-inflation income return could be worthwhile over the coming years. Alongside diversity and a focus on value stocks, this could help you to beat a Cash ISA and improve your chances of making a million.
