Investing £10k, or any other amount, in UK shares today may seem to be a risky move after the stock market crash. Threats such as Brexit and coronavirus could cause share prices to come under further pressure in the short run.
However, the low valuations present across the stock market suggest that investors may have priced in many of the risks facing the UK economy. As such, buying a diverse range of high-quality businesses in a Stocks and Shares ISA could produce impressive returns in the long run.
Cheap UK shares could experience recoveries
It’s difficult to envisage a recovery for many cheap UK shares at the present time. Industries such as banking, travel & leisure, consumer goods and energy face extremely difficult outlooks that are set to cause poor sales and profit growth in the coming months.
However, in the long run, many companies currently unpopular among investors could deliver impressive turnarounds. The past performance of the economy shows it has always delivered positive growth following challenging periods. And, with a vast amount of monetary policy stimulus having been promised, the outlook for asset prices could be more positive than company valuations currently suggest.
Furthermore, many cheap UK shares are high-quality businesses. Certainly, their sales prospects for the current year and next year may be poor. However, in many cases, they have the financial strength to overcome difficult trading conditions. That means they can benefit from improving performances in the coming years. As such, buying them now while they appear to offer wide margins of safety could prove to be a profitable move.
Realistic returns ahead of a second stock market crash
Of course, the returns from UK shares may be disappointing in the short run due to the presence of risks such as coronavirus. Investors could realistically experience paper losses in the coming months. Especially if the economic outlook deteriorates further, prompting a second stock market crash.
However, over the long run, the returns on today’s cheap stocks could prove to be above the market average. Even if they’re not, investors can realistically expect to experience total annual returns of around 8%. That’s the total annual return of the FTSE 100 since its inception in 1984. Assuming such a return, a £10,000 investment today could be worth £21,600 in 10 years, or £46,600 in 20 years.
Other assets may provide greater stability than UK shares in the coming months. But buying a diverse range of British stocks could have a more positive impact on your ISA in the long run. Focus on companies with low valuations and solid financial positions. Such features can allow them to benefit from a likely economic recovery. That way you could obtain a high return that improves your financial position in the coming years.
