The rising gold price may tempt investors to ditch UK shares and buy the precious metal. However, while recent trends may continue in the short run, in the long run following Warren Buffett’s advice and buying cheap stocks could be a better means of building a growing ISA portfolio.
Many FTSE 100 and FTSE 250 shares are currently trading on low valuations. Over time, they could generate impressive returns that turn a £250 monthly investment into a surprisingly large nest egg.
The return prospects of UK shares
UK shares have experienced an extremely turbulent period since the start of the year. While this has led to paper losses and disappointment for many investors, it could present a buying opportunity. Investors such as Warren Buffett have previously used periods of stock market declines to their advantage, since there are opportunities to buy high-quality companies when they trade at low prices. Over time, indexes such as the FTSE 100 and FTSE 250 have always recovered to produce new record highs. This could lead to impressive capital returns from using a buy-and-hold strategy.
The return prospects for crashing stocks could be more impressive than those of other assets, such as gold. Certainly, a low interest rate environment and an uncertain economic outlook may persist over the coming months. However, the gold price may not necessarily rise at the same pace as it has done in recent months. Its current value may factor in many potential catalysts that limit its investment appeal relative to UK shares over the long run.
Investing regularly in an ISA
Of course, buying a large chunk of UK shares in one transaction may not necessarily the best means of capitalising on low valuations. There is a risk of a second market crash, which could mean that investors end up being too early when it comes to buying undervalued stocks for the long term.
Therefore, a better idea may be to invest regularly over a long period. For example, investing £250 per month in UK stocks through a Stocks and Shares ISA could deliver a portfolio valued at £100,000 within 17 years. This assumes an annualised return of 8%, which is similar to that achieved by the FTSE 100 since its inception. With share prices currently offering excellent value for money in many cases, you could obtain an even higher rate of return that leads to a larger portfolio within the same timeframe.
In the short run, other assets such as gold may yet outperform UK shares should the economic outlook deteriorate. However, buy-and-hold investors such as Warren Buffett have generated high returns from buying following a market crash. Using the same strategy may enhance your ISA returns, and significantly improve your financial prospects as the world economy gradually returns to growth after its current woes.
The post Forget gold! I’d follow Warren Buffett and invest £250 a month in the best UK shares appeared first on The Motley Fool UK.
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Motley Fool UK 2020