Cheap UK shares may not necessarily outperform buy-to-let property in the short run. Risks such as a global economic slowdown, as well as housing market stimulus such as the stamp duty holiday, may hold back the stock market and send house prices higher.
However, over the long run the FTSE 100 and FTSE 250 could produce higher returns, with less risk, than buy-to-let property. As such, now could be the right time to avoid buy-to-let and buy a diverse range of UK stocks in an ISA.
Through focusing your capital on the stock market, you could follow in the footsteps of successful value investors such as Warren Buffett who have previously used share price declines to their advantage.
Buying UK shares after a market crash
The factors that caused UK shares to experience a stock market crash earlier this year could hold back the stock market in the short run. For example, there may be a second wave of coronavirus and Brexit could weigh on investor sentiment.
However, over the long run, the FTSE 100 and FTSE 250 could deliver high returns. As well as having solid track records of high-single-digit annualised growth, many of the indexes’ members currently trade at bargain prices. Therefore, they may offer wide margins of safety that provide investors with a large opportunity to benefit from a stock market recovery.
Due to the potential to diversify across a range of UK shares, investors can limit the risks faced by their portfolios. Although a further market crash would be likely to negatively impact on any stock market portfolio, reducing your exposure to a concentrated number of stocks could limit your reliance on a small number of businesses for your returns.
The opportunities for capital growth in the buy-to-let sector appear to be significantly more limited than among UK shares. House prices have risen to record highs of late, which could make them less affordable to a larger number of people.
Certainly, government policies such as a stamp duty holiday may support short-term house price growth. However, as those policies come to an end, house prices may need to experience a period of slower growth so that first-time buyers can afford to get on the property ladder. This may lead to disappointing returns for investors compared to the growth they have enjoyed over recent decades.
Furthermore, diversifying across the buy-to-let sector is far more challenging than it is among UK shares. Buying several properties to spread the risk may be unaffordable for many investors, which could mean that you are reliant on a small number of properties for your returns. Therefore, by focusing your capital on UK stocks after the recent market crash, you can obtain a more attractive risk/reward ratio for the long term.
The post Forget buy-to-let! I’d follow Warren Buffett and buy the best cheap UK shares in an ISA appeared first on The Motley Fool UK.
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Motley Fool UK 2020