Buying cheap UK shares to obtain a Stocks and Shares ISA valued at over a million may not be viewed as a sound strategy by some investors. The market crash has highlighted the volatility that can be present across the FTSE 100 and FTSE 250, which can cause portfolio valuations to quickly decline.
However, over the long run, a regular investment or lump sum invested in undervalued stocks can produce surprisingly high returns. As such, now could be the right time to start buying cheap British stocks ahead of their likely long-term recovery.
Buying opportunities in a Stocks and Shares ISA
While cheap UK shares may be on offer after the market crash, Stocks and Shares ISA investors may naturally be drawn to other assets at the present time. Risks, such as Brexit and coronavirus, may convince some investors to focus on defensive assets, such as bonds, cash and gold.
They may offer short-term stability should the economic outlook deteriorate. But their potential to help you in making a million in the coming years may be somewhat limited.
For example, low interest rates may mean cash and bonds fail to provide returns in excess of inflation. Meanwhile, gold’s price is already close to a record high. And, as investor sentiment improves and the economy’s growth rate moves into positive territory, the precious metal’s appeal may decline.
This may prompt a fall in its price. Or at least a lack of significant capital growth over the long run.
Making a million with cheap UK shares
By contrast, purchasing cheap UK shares in a Stocks and Shares ISA can produce a seven-figure portfolio over the long run. The stock market’s past performance suggests an 8% annual total return is a realistic goal for investors. Therefore, investing £100k today, or £750 per month, could produce a portfolio valued at over a million in a period of around 30 years.
However, the time it takes to make a million could be lessened through investors purchasing undervalued stocks. Following this year’s market crash, many FTSE 100 and FTSE 250 shares are trading at valuations that are exceptionally low compared to their long-term averages.
Over time, a reversion to their averages could take place. Especially since many companies have solid balance sheets and sound growth strategies. This may produce higher returns than the market average that improves your prospects of making a million.
Buying the right stocks
Clearly, some cheap UK shares are trading at low prices because they face significant difficulties. Therefore, it may be prudent to buy high-quality businesses – even if they’re not among the cheapest stocks around. They may have wider economic moats than their peers, or stronger financial positions that improve their capacity to survive short-term risks.
Over time, they may produce higher returns that further increase your chances of building a £1m+ Stocks and Shares ISA.
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.