Despite gaining a bit of momentum in recent weeks, UK shares continue to look like terrific value to me right now. Whether investors are aiming to establish a passive income stream or unlock tremendous growth potential, buying high-quality stocks while they’re cheap is a proven strategy for building wealth.
What’s more, it doesn’t take much money to capitalise on the current situation to aim for a seven-figure portfolio. In fact, just £200 a month could do the trick. So, how can investors pull off this feat when starting from scratch?
Invest. Don’t speculate
There are always exotic penny stocks and small-caps with exciting ideas that could cause a stock price to skyrocket. But sadly, in most cases, the number of unknown factors, both internally and externally, makes buying these shares a bit of a gamble.
This is especially true for industries like biotech. There have been countless drug candidates promising to cure the world’s most horrific diseases. And if they succeed, then achieving triple- or even quadruple-digit returns isn’t unrealistic.
The problem is the odds of success are slim to none. Over 90% of drug candidates fail during clinical trials. And when paired with the exceptionally high cost of drug development, a failed trial can mark the death of a small-cap business.
In other words, speculating can make investors rich quick. But it can be a bit like the lottery, with a high chance of being left with nothing.
Investing, on the other hand, provides far better odds. By focusing on proven businesses with tremendous long-term potential and healthy fundamentals to back them up, building wealth becomes far more likely. And with a bit of patience, it can be just as lucrative, especially when buying these stocks at dirt cheap prices.
Reaching £1m
Investing is a long-term game that shouldn’t be interrupted. Therefore, once money has been put into a portfolio, investors should act as if they won’t be able to access it for years to come. And if that means only around £200 can be allocated each month, then that’s the limit investors have to work with.
The good news is, even with this relatively modest sum, it’s still possible to reach millionaire status when starting early. Looking at the FTSE 250, it has achieved an average annualised return of around 11%. At this rate, investing £200 a month would translate into a £1m portfolio in approximately 35 years.
However, by capitalising on discounted valuations, it’s possible to achieve market-beating returns. And even an extra 1% is enough to add another £250k of value to a pension pot.
Nothing is risk-free
Having £1.25m in the bank certainly sets someone up for a comfortable retirement. Following the 4% withdrawal rule, that’s enough to provide a retirement income of £50,000 per year. However, as wonderful as this sounds, there’s a bit of a caveat called risk.
Investing in the stock market, even when it’s cheap, doesn’t guarantee wealth. Even if someone is a master stock-picker, a poorly timed crash or correction can undo years of progress – something that’s likely to happen multiple times over the next four decades.
Therefore, investors may end up with considerably less than expected when the time comes to retire. However, even with this risk, a well-executed and properly managed portfolio can still drastically improve the financial prospects of an investor in the long run, in my opinion.
The post I’d start buying cheap UK shares with just £200 a month to aim for a million appeared first on The Motley Fool UK.
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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.
