Today may not seem to be the right time to start investing in cheap UK shares. The weak economic outlook and risks such as Brexit could prompt a second stock market crash. This could lead to losses for stock market investors in the short run.
However, the risks currently facing investors could make now the perfect time to start investing for the long term. Many high-quality companies are currently trading at low prices that are likely to recover in the coming years.
Therefore, if you’ve no retirement savings, buying stocks today could improve your financial outlook. Doing so may even help you to retire early.
Cheap UK shares
Despite the stock market’s recovery since the 2020 crash, there are still a wide range of cheap UK shares available to buy. In some cases, they’re undervalued because they face uncertain operating conditions. However, in other cases, they’re cheap because investor sentiment towards the wider stock market is currently weak.
This may provide long-term investors with buying opportunities. In previous crises, buying undervalued stocks and holding them for a period of many years has proven to be a sound strategy. It’s allowed investors to take advantage of low prices likely to be positively impacted to a greater extent than overpriced stocks by a long-term economic recovery.
Certainly, buying cheap UK shares is unlikely to produce high returns in the short run. As mentioned, numerous risks could negatively impact on the stock market’s performance in the coming months. However, an investor aged 40, or someone who has a long-term horizon, is likely to have sufficient time to benefit from a likely economic recovery. And that would catalyse their portfolio’s performance.
Starting to invest for retirement
Cheap UK shares may prove to be a better means of saving for retirement than other mainstream assets. Low interest rates mean that cash and bonds offer relatively low rates of return. Meanwhile, high house prices and the large cost of a deposit may mean that buy-to-let property is unappealing, even as government support sends the market higher in the short run.
Even investing relatively modest amounts of money in a selection of British shares can produce a surprisingly large retirement nest egg. The stock market’s annual returns have been around 8% over recent decades. Assuming that rate of return, a £250 monthly investment would produce a portfolio valued at £240,000 over a 25-year time period.
Of course, buying cheap UK shares today could produce an even higher rate of return that has a greater impact on your portfolio’s valuation by retirement. Therefore, now could be just the right time to start buying stocks after the market crash. They appear to offer wide margins of safety that could improve your long-term financial outlook.
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.