November 27, 2020

Stock market crash: I’d buy cheap UK shares in a Stocks and Shares ISA today to make a million

The stock market crash may mean the task of making a million is now easier for Stocks and Shares ISA investors. That may sound counterintuitive at first glance, since many cheap UK shares are facing difficult outlooks. However, low valuations on offer across the stock market mean that now could be the right time to build a portfolio for the long term.

Through diversifying across different sectors and focusing on high-quality stocks, you could build an ISA valued at over £1m faster than you may realise.

Buying opportunities after the stock market crash

The stock market crash has caused a wide range of UK shares to trade at cheap prices. In some cases, they’re merited. For example, some companies have weak balance sheets and business models that may not survive a difficult and fast-changing period for the economy. However, other stocks have sound financial positions and a competitive advantage over their peers that’s currently not reflected in their prices.

Buying such companies when they trade at low prices has historically been a sound means of building a large Stocks and Shares ISA over the long run. For example, investors who purchased FTSE 100 stocks at cheap prices after the financial crisis are likely to have benefitted from the stock market’s subsequent recovery.

A rising stock market may seem unlikely right now due to risks such as coronavirus and Brexit. But, over the long run, equity markets are likely to enjoy a period of sustained growth.

Making a million with cheap UK shares

Buying high-quality businesses after the stock market crash may allow you to generate market-beating returns in the long run. This could have a significant impact on your chances of making a million.

For example, assuming the same 8% annual return the FTSE 100 has delivered since inception would mean a £500 monthly investment takes 35 years to become £1m. However, even beating the stock market by 2% per year to obtain a 10% annual return means the same monthly investment becomes worth over a million around five years earlier.

Certainly, generating a 10% annual return after the market crash seems like an exceptionally difficult task to some investors. However, the stock market’s track record of recovery and the low prices on offer across the index mean that Stocks and Shares ISA investors could realistically beat the market over the long run.

Reducing risks

Of course, the prospect of another stock market crash means managing risk is crucial. Therefore, diversifying across a wide range of companies could certainly be a sound move. It may enable you to access high returns over the coming years, while limiting your reliance on a small number of businesses. This may improve your prospects of making a million in the long run.

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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.

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