Cheap shares, of course, are good for investors. If I can invest at a low point, I can get the biggest return. The biggest lows for the FTSE 100 in the last 20 years were after the 2008 crash and the Covid crash, both of which would have been highly profitable times to start investing. 

The important question then: is this really a rare opportunity to buy into cheap UK shares? Let’s start with the evidence.

A Liberum article recently stated that UK shares “trade at a huge discount to US and European peers”. It estimates a 30% discount against US shares and a 25% discount against European ones. 

Only 11%

Those are pretty telling figures. What might be even more telling is the same piece explains that the FTSE 100 has gone up only 11% in 23 years. That is ignoring dividends, but is still an atrocious return.

The key detail in all this, though, is that revenues and profits are still rising. 

The P/E ratio (price-to-earnings) can help me here. It allows me to compare share prices while taking into account the profits that companies make. The CAPE (cyclically adjusted P/E) — like a 10-year P/E ratio average — can help, too.

The FTSE 100 looks cheap both compared to US stocks and by historical standards, from this data at least. One way of looking at it: for every pound (or dollar) of profit, the FTSE 100 shares are cheaper to buy. 

Individual companies show the same trend, that is, increased profits without the share price going up to match. Here are some particular examples.

The data seems pretty clear: UK stocks look underpriced. So much so, I’d say, that the term ‘once-in-a-generation’ seems justified.

If UK shares are so cheap then, am I throwing all my money into them? Well, the uncertainty since Brexit and a chronic lack of innovation are both big problems with companies in this country. These issues, and perhaps others too, do explain the deflated prices to some degree.

So, it’s not like UK stocks are obvious buys. However, as a contrarian investing strategy, buying into British companies could offer some real wealth–building potential. It’s often said that doing the opposite of the market is where you get the best returns.

In 10 years

The famous (apocryphal?) story comes to mind of the investor who knew it was time to sell when even his shoeshine boy was giving him stock tips. I can take a similar attitude by buying up UK shares right now as others are cautious. In 10 years, I might look back on this period as a great ‘low’ to buy into.

It might sound obvious, but the right research here is key. I don’t expect every UK stock to be excellent value, but I do believe there are lots of undervalued gems out there at the moment.

The post Is this really a once-in-a-generation opportunity to buy cheap UK shares? appeared first on The Motley Fool UK.

But let’s say I had an empty ISA and nothing else. I think I could target a £3,134 monthly passive income, even without saving anywhere near the yearly deposit limit. Here’s how. 

My strategy begins with saving a little cash. After all, my ISA won’t do anything while it’s still empty, and the more money I can put in there, the more passive income I can work towards. 

I think £250 per month seems like a good starting point. At £3,000 a year, it’s miles away from the ISA deposit limit of £20,000. Regardless of the amount, all my earnings from the account are mine rather than the taxman’s. 

The problem though, and a very big one at that, is that saving alone is not nearly enough.

Even if I had to scrimp and save to build this, after 10 years I’ve only got £30,000. After two decades, I would have less than the average house deposit. 

A Cash ISA would give me better returns, it’s true. I can get up to 6% in some accounts right now, and the interest I get is guaranteed. On the surface, that sounds like a good way to grow my money. 

8% inflation

But 6% means I’m losing money in real terms compared to 8%+ levels of inflation. And the return I get from these accounts is always tied to interest rates and therefore inflation. If I’m not beating inflation, then I’m not actually growing wealth. 

The solution instead is a Stocks and Shares ISA. Investing in stocks has proven for decades and centuries to be the best wealth-building tool the average person has available to them. I use my ISA to invest, to own a small part of a company. As it makes money and grows, my money grows too.

The return from investing in stocks and shares is variable. Here are a few examples.

This table really shows the power of a Stocks and Shares ISA. And the difference between the 7% return and the 13% return shows how important good stock choices are. 

The 10% return is what many people aim for with stocks. It’s in line with the historical returns from big firms in the US and UK. For this reason, a lot of investors like to put money in funds that track an entire stock market index. 

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

£3,134 a month

This strategy isn’t risk-free. No returns are guaranteed and many individual companies do go bankrupt. I can limit these risks with diversification, and I do make sure my holdings are spread out  across many sectors. 

If I was to build my empty ISA up to that £940,379 value, I could then safely withdraw at 4% yearly. As a passive income, that would give me an attractive-sounding £3,134 a month. In the future, that would be worth less due to inflation, but still, it shows why I see investing as the best path to another income stream.

The post Turning an empty ISA into a £3,134 monthly passive income appeared first on The Motley Fool UK.