Buying cheap UK shares to build a retirement nest egg may not sound like a worthwhile move at the present time. Risks such as Brexit and coronavirus could cause a further stock market crash later this year.
However, by following billionaire investor Warren Buffett’s lead and purchasing undervalued shares, you could build a surprisingly large nest egg. In doing so, you may reduce your reliance on what continues to be a relatively inadequate State Pension.
Buying cheap UK shares after a stock market crash
Following the stock market crash, there are a wide range of cheap UK shares available to buy. Purchasing them now could mean you benefit from their long-term growth potential. Especially since an economic recovery is likely to take place in the coming years.
Buffett has used a similar approach for many decades. His aim has consistently been to buy high-quality businesses when they are suffering from temporary challenges. For example, a company may have a solid financial position and a competitive advantage over its peers that can produce high profit growth in the long run. However, in the short run, it may be suffering from weak consumer sentiment or challenging economic conditions that will eventually improve.
Certainly, some cheap UK shares deserve to trade at low prices. In some cases, they may struggle to survive what could be a difficult period as the coronavirus pandemic continues. However, investors who have a long-term horizon are likely to have sufficient time for them to post recoveries as sentiment improves and their profitability moves higher.
Building a nest egg to beat the State Pension
While other assets may be less risky than cheap UK shares in the short run, their long-term growth potential may be somewhat lacking. For example, bonds and cash offer low returns due to a loose monetary policy. Meanwhile, high house prices suggest the buy-to-let market may lack value for money.
By contrast, indexes such as the FTSE 100 and FTSE 250 haven’t yet recovered from the recent stock market crash. Within them, many companies with dominant market positions and long-term growth potential currently trade at prices that are significantly below their historic averages. This suggests that they offer wide margins of safety that could translate into high returns in the long run.
As such, buying a diverse range of cheap UK shares could be a sound means of overcoming the State Pension. With it amounting to just £9,110 per year, it is unlikely to provide financial freedom for most people in older age. Therefore, now could be the right time to follow Buffett and buy strong businesses at prices that do not fully reflect their future prospects. Doing so could improve your retirement prospects 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.