Even through the recent market crash has caused the prices of UK shares to decline, it could provide a rare opportunity to buy undervalued businesses. Over time, they’re likely to recover in many cases, which could boost your portfolio returns.
As such, now could be the right time for anyone seeking to build a £1m ISA to get started. Through focusing on companies with sound balance sheets and the capacity to adapt to changing market conditions, you could increase your chances of becoming an ISA millionaire.
UK shares with sound balance sheets
Even though many stocks have the potential to recover from the market crash, those with sound balance sheets are more likely to do so. At present, it’s unclear how long and how severe the period of economic weakness will be.
Therefore, companies that have fewer fixed costs in case of a second lockdown, as well as modest leverage and strong cash flow, may have a higher chance of being around in the coming years to benefit from a recovery.
Investors can use freely available information, such as a company’s annual report, to ascertain its financial strength. Through focusing your capital on the strongest businesses from a financial perspective, it may be possible to improve your long-term returns prospects.
Low valuations after a market crash
Clearly, valuations across the FTSE 100 and FTSE 250 could move lower in the short run should there be a second market crash. However, this risk seems to be priced in to the valuations of many UK shares.
In some cases, they have valuations significantly below their long-term averages, yet they are expected to produce improving financial performances over the coming years.
Furthermore, undervalued businesses may have the capacity to adapt to changing market conditions in many cases. Some equity prices may be low because of weak investor sentiment towards the wider stock market.
This could provide long-term investors with the chance to buy high-quality companies while they offer wide margins of safety, thereby improving their ISA return prospects in the long run.
Building a £1m ISA
Obtaining a £1m ISA may seem unlikely after the recent market crash. However, investing following such periods has been a logical move in the past. It enables investors to access low valuations for strong businesses that can not only survive the short run, but benefit from a likely long-term recovery.
Clearly, obtaining a £1m ISA isn’t going to be a quick, or smooth, process. Risks are likely to persist in the coming months that could lead to challenging periods for investors.
However, through buying undervalued UK shares that have solid financial positions, your portfolio may outperform the stock market and become valued at over £1m in the coming years.
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.