Buying cheap UK shares right now could be one of the best ways to grow your financial nest egg. It may even be possible to build a £1m fortune by investing just £100 a month in undervalued UK equities.
Time to buy cheap UK shares
Buying cheap UK shares after a market decline could prove to be a sound move. Indeed, it’s a strategy that’s been successfully employed by investors such as Warren Buffett.
Even though the recent market crash caught many investors by surprise, it’s not uncommon for the stock market to decline suddenly. For example, over the past two decades, the FTSE 100 has lost around 50% of its value on more than two occasions.
The market tends to go through boom and bust periods, but investors shouldn’t be afraid of declines. Instead, we should try and make the most of these slumps to buy cheap UK shares. And then sell them on at a later date at a higher price.
This approach may seem difficult to replicate considering the challenging economic outlook for the UK economy. It’s almost impossible to predict market patterns in the short run. As such, investors may experience paper losses in the near term as the coronavirus crisis continues to impact business activity.
Nevertheless, the market’s strong track record of recovering from deep slumps suggests you can increase your chances of generating a high return from the stock market by taking a long-term outlook.
Focus on quality
Buying cheap UK shares may be an excellent way to generate substantial investment returns over the long run. However, some companies may be better investments than others.
High-quality blue-chip stocks with strong balance sheets could perform better over the long run. They are also less likely to suffer near-term problems if the economy continues to struggle.
Companies that have a competitive advantage over the rest of their sector or industry may also be a suitable investment in the current environment. These include businesses that offer a unique product or have a lower cost base than their rivals.
These advantages may increase their chances of surviving a tough economic period and could boost their chances of growing market share to generate higher profitability in the recovery.
The road to a million
By making the most of the tax benefits available with a Stocks and Shares ISA, investors could significantly increase their chances of being able to make a million from cheap UK shares.
For example, over the past 35 years, the FTSE 250 has produced an average annual return for investors of 12%. At this rate, it would take roughly 39 years to turn £100 a month into a £1m fortune.
By acquiring high-quality cheap UK shares while they offer value for money, investors may be able to replicate this performance.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.