Investing £5 a day in cheap UK shares to make £1m sounds far-fetched at first glance. After all, a £5 daily investment works out as £1,825 per year, or £91,250 during a 50-year working life.
However, the past performance of the stock market shows that compounding can have a major impact on an individual’s returns and financial prospects. It can turn modest amounts of capital into vast sums over the long run.
By investing money in cheap stocks from across the FTSE 350, it’s even possible to outperform the market. And that could generate a seven-figure portfolio at a faster pace.
Making £1m with cheap UK shares
Assuming an investor buys cheap UK shares on a monthly basis, they could obtain a £1m portfolio within their working lives. For example, the stock market has recorded annualised total returns of around 8% in recent decades. Assuming the same return on a £5 daily investment, which is invested monthly for practical reasons, would produce a £1m portfolio within around 48 years.
Clearly, not everyone will have 48 years in which to generate a seven-figure portfolio. As such, investing in cheap stocks could be a sound move. They may provide scope for greater capital returns that lead to an outperformance of the wider stock market.
Investors may currently be undervaluing many companies due to their uncertain near-term outlooks. Through investing money in them, and holding them over the long run, it’s possible to benefit from their improving financial performances and stronger investor sentiment.
Focusing on high-quality stocks
Of course, buying some cheap UK shares may not provide an attractive risk/reward opportunity. Some stocks may well be priced at low levels for a very good reason. For example, they may have weak balance sheets or lack an economic moat that can propel them towards a recovery.
As such, it’s important for an investor to focus their capital on high-quality businesses. Clearly, defining what makes a company attractive is very subjective. However, they’re likely to include companies set to benefit from changes within their industries, an improving economic outlook, as well as those businesses with solid financial positions and a clear competitive advantage.
Over time, high-quality companies may be more likely to outperform other cheap UK shares. They may stand a better chance of overcoming short-term threats so they can capitalise on a likely economic and stock market recovery.
Starting to invest in shares today
Clearly, some investors may be hesitant about purchasing cheap UK shares today after the 2020 stock market crash. Furthermore, economic and political risks are relatively high. However, those threats create buying opportunities for long-term investors. They may be able to purchase high-quality companies when they trade at low prices. Over time, this may increase their chances of obtaining a £1m portfolio.
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.