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I’d invest £5k in crashing UK shares in an ISA today, ahead of a stock market recovery

Even though some UK shares have rebounded following the 2020 stock market crash, indexes such as the FTSE 100 and FTSE 250 continue to trade significantly below their price levels from earlier this year.

As such, there may be opportunities to buy high-quality stocks with £5k, or any other amount, while they trade at cheap prices. Over time, they could generate high returns as the stock market recovers. This could improve your financial outlook, and allow you to build a surprisingly large Stocks and Shares ISA in the coming years.

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Stock market recovery potential

A stock market recovery may seem to be a distant prospect for many investors that could dissuade them from purchasing UK shares at the present time. However, even if there are further challenges for the economy and for companies in the FTSE 100 and FTSE 250, the long-term outlook for equities seems to be bright.

For example, since its inception in 1984, the FTSE 100 has recorded an annualised total return of around 8%. The FTSE 250’s total return is even higher, with it pushing towards a double-digit annualised total return since inception. The indexes have achieved these levels of performance despite experiencing severe economic recessions and bear markets along the way. Therefore, even if there are further declines, and potentially a second market crash, the long-term prospects for the stock market appear to be very positive.

Furthermore, low interest rates and stimulus packages such as quantitative easing could boost the prospects for UK shares. After the most recent major recession during the global financial crisis, an accommodative monetary policy contributed to rising asset prices. A similar scenario could follow the recent market crash and allow the FTSE 100 and FTSE 250 to produce strong recoveries.

Buying UK shares today

Assuming that UK shares offer an annualised total return of 8% over the long run, building a portfolio of stocks today could be a sound move from a return perspective. For example, investing £5k at such a return over a period of 30 years could lead to a portfolio valued in excess of £50k. And, by continuing to invest over the coming months at a time when stock market volatility could be high, you may be able to build an even larger portfolio over the long run to improve your financial prospects.

Of course, buying stocks in a Stocks and Shares ISA is a logical approach to take. ISAs are cheap to open and administer, and offer tax-efficiency as well as flexibility in terms of when capital can be withdrawn. Over time, tax-efficient accounts such as an ISA can have a positive impact on your financial prospects, and may help to provide a further boost to your portfolio alongside the stock market’s likely recovery after its recent market crash.

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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.

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