.With UK shares still trading at cheap prices in many cases, drip-feeding money into FTSE 100 and FTSE 250 stocks could lead to impressive returns in a stock market rally.
Certainly, there are short-term risks ahead that may derail the performance of stocks in the short run. However, the track record of the FTSE 100 and FTSE 250 shows that a long-term stock market rally is likely after this year’s market crash. As such, a diverse portfolio of high-quality stocks could deliver attractive performances in the coming years.
A stock market recovery that lifts UK shares
The stock market rally that’s lifted the prices of many UK shares may or may not continue in the short run. The prospects for FTSE 100 and FTSE 250 shares continue to be uncertain. Risks such as Brexit and the coronavirus pandemic could negatively impact on operating conditions and investor sentiment in the coming months.
However, over the long run, a strategy of drip-feeding money into UK shares could pay off. The past performance of the stock market shows it’s always delivered new record highs after its variety of declines. By doing so, it’s produced annual total returns of around 8%. Similar returns could lead to a surprisingly large ISA portfolio value for regular investors in FTSE 100 and FTSE 250 shares.
Regular investing in FTSE 100 and FTSE 250 shares
A monthly investment of £250 in UK shares could lead to a surprisingly large portfolio in the long run. Assuming an 8% annual return, which is in line with the past total returns of the FTSE 100 and FTSE 250, it could produce an ISA portfolio valued at around £575,000 over a 35-year period.
Clearly, not every investor will have £250 to invest each month. Others may not have 35 years available to allow it to grow. However, it may be possible to obtain a market-beating rate of return. That means purchasing today’s high-quality FTSE 100 and FTSE 250 stocks when they trade at cheap prices. They may offer greater scope to deliver capital growth over the long run. Certainly as a stock market rally is likely to continue in the coming years.
Building a solid ISA portfolio
Of course, it’s important to consider risk, as well as potential returns, when investing money in UK shares. A regular investment strategy allows an investor to take advantage of future stock market crashes because they can purchase shares at lower prices. Furthermore, building a diverse portfolio of stocks from across the FTSE 100 and FTSE 250 can reduce risk. That’s because one company’s performance has a relatively small impact on overall returns.
Certainly, the near-term prospects for shares may be uncertain. It’s about investing money regularly in a diverse range of high-quality shares at low prices. By doing that, it’s possible to generate high returns in an ISA in a stock market rally.
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.