Buying cheap UK shares today could prove to be a risky move in the short run. After all, the outlook for the world economy is uncertain, and coronavirus cases continue to rise.
Therefore, investors may focus their capital on buy-to-let investments at a time when house prices are showing early signs of recovering.
However, over the long run, FTSE 100 and FTSE 250 shares could deliver strong recoveries that improve your chances of making a million. As such, now could be the right time to build a diverse Stocks and Shares ISA made up of high-quality businesses.
Cheap UK shares
Despite the recent stock market rebound, a wide range of UK shares appear to be trading on low valuations. This may partly be because their financial forecasts are disappointing as a result of weak trading conditions. However, it may also be down to investor apathy towards risky assets such as equities.
This may mean there is an opportunity for long-term investors to purchase high-quality businesses while they offer wide margins of safety. In other words, their current prices may not fully reflect their market position, or their capacity to deliver rising profitability in the coming years.
The stock market’s past performance shows that it naturally experiences booms and busts. Investors who can look beyond short-term risks and buy attractive UK shares when they are undervalued could benefit from a likely recovery as investor sentiment and the economy’s prospects improve.
Buy-to-let valuations
By contrast, it is more difficult to unearth undervalued properties than it is to find cheap UK shares. House prices have moved to extremely high levels in some areas due partly to continued low interest rates. Although this trend may continue in the short run as supportive government policies have an impact on buying behaviour, over the long term a lack of affordability may hold back house price growth.
Furthermore, factors such as weak economic growth and high unemployment may cause rental growth to slow, or even to stall. This may lower the total returns available to buy-to-let investors, and reduce the overall appeal of becoming a landlord.
Starting today
Although purchasing a wide range of UK shares today may not feel like the right move to many investors, history suggests that buying undervalued stocks can ultimately be a profitable move. Buying while risks are elevated means that wide margins of safety are on offer. As investor confidence improves and the economic outlook does likewise, those attractive valuations may fade and lead to lower return prospects.
Therefore, now could be the right time to build a Stocks and Shares ISA of undervalued FTSE 100 and FTSE 250 shares while they are still trading at appealing price levels. Over time, they could improve your chances of making a million.
