Investing money in cheap UK shares on a regular basis could lead to a surprisingly large ISA nest egg. The stock market’s track record shows it has produced high single-digit annual returns on a regular basis over the long run.
Therefore, it could allow someone with no retirement savings at 40 to build a surprisingly large nest egg by the time they retire. It may even help them to make a million.
Buying cheap shares for the long run
The stock market crash means there are a wide range of cheap UK shares available to buy. Although the FTSE 100 and FTSE 250 have rebounded since March, risks such as Brexit and coronavirus mean that they still trade well below their 2020 starting prices.
As such, many high-quality businesses currently have valuations that have not been present for a number of years. Investors are demanding wide margins of safety due to the challenging operating conditions that many companies face in the short run.
Some investors may feel uneasy about buying undervalued British shares. There is a chance they could decline in the short run if the economic outlook deteriorates. However, over the long run, they appear to have excellent recovery potential. In fact, the stock market has always returned to long-term growth after its downturns. Through buying a selection of cheap UK shares before they have recovered, you may be able to achieve above-average returns in the coming years.
Moreover, someone aged 40, or who has a long time horizon, is likely to have sufficient time for their cheap UK shares to overcome short-term declines. This means that buying undervalued shares today could be a sound move – even if they experience temporary falls in the coming months.
Making a million
Buying a diverse range of cheap UK shares could mean that you outperform the stock market in the long run. However, it is possible to build a large retirement portfolio even if you match the return of indexes such as the FTSE 100 and FTSE 250.
For example, the FTSE 100 has returned 8% per annum on a total return basis since its inception in 1984. Investing £200 per week at that rate of return from age 40 until you retire at 67/68 years old would produce a portfolio valued at around £1m. From this, a passive income could be drawn that provides much greater financial freedom than that offered by the State Pension.
Of course, cheap UK shares could offer an even higher rate of return than indexes such as the FTSE 100. As such, now could be the right time to start investing money regularly in the best value British stocks in the FTSE 100 and FTSE 250. Doing so may improve your retirement prospects as the stock market recovers 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.