Investing regularly in cheap UK shares can build up a surprisingly large nest egg. Over long time periods, the stock market has an impressive track record of delivering remarkable returns. And while a crash or correction occasionally rears its ugly head, like in 2022, these volatile periods always eventually end, paving the way for a spectacular recovery.
So much so that even someone who’s just turned 40 with no savings can potentially build a £1m ISA before retirement. Here’s how.
Capitalising on cheap UK shares
While unpleasant, last year’s stock market correction has created plenty of opportunities for shrewd investors. Although the FTSE 100 has largely recovered, the same can’t be said for the FTSE 250, which is still down 12% compared to a year ago.
With fear driving stock prices, plenty of businesses have seen their market caps slashed as investors flee the markets. And in some cases, this concern is justified. After all, rising interest rates have a tangible impact on companies, especially financially weak ones. But not every enterprise is doomed.
There are plenty of top-notch UK shares now trading at cheap valuations. Things may be a bit wobbly in the short term. But in the long run, many of these firms remain solid, with business models intact and demand still growing. And given sufficient time, performance will likely recover before reaching new heights.
This is precisely why the stock market has a perfect track record of recovery from every crash and correction in history. While not every business survives, the ones that do often lead the charge.
Separating the good from the bad is obviously easier said than done. Stock picking is quite a difficult skill to learn. But a good place to start in a volatile market is the balance sheet. Even if an investor is looking at the world’s most revolutionary disruptive British company, it’s all for nought if there aren’t enough financial resources to survive in the short term.
After eliminating the weak and vulnerable from consideration, the next step is to dig into the quantitative and qualitative factors to try and find a long-term winner.
Making a million from age 40
Picking individual cheap UK shares is a proven method to beating the stock market in the long run. However, this isn’t for everyone. As previously stated, stock picking is hard. And not everyone is cut out to ride what often ends up being an emotional rollercoaster.
Fortunately, there’s an alternative. Investors can easily replicate the stock market’s performance by owning shares in an index fund.
For example, since its inception, the FTSE 250 has delivered total returns of roughly 10.6% each year. Let’s assume the UK index continues to provide these returns moving forward. Investing just £165 a week is enough to build a £1m portfolio within 25 years. For a 40-year-old looking to retire at 65, that’s just in time.
Of course, with investing, there are never any guarantees. Two-and-a-half decades is plenty of time for multiple stock market crashes and corrections to occur. And depending on the timing of these events, investors could end up with considerably less than expected. That’s especially true for stock pickers who often end up with significantly more volatile portfolios than an index.
It’s a risk that needs to be considered, but one worth taking, in my opinion.
