The stock market crash may have dissuaded some investors from buying cheap UK shares through which to build an ISA portfolio for retirement. However, now could be the right time to take advantage of low valuations across the FTSE 100 and FTSE 250.
Over time, they may deliver impressive returns that outperform other mainstream assets. They could produce a surprisingly large retirement portfolio that provides a generous passive income in older age.
Buying cheap UK shares today
The main advantage of buying cheap UK shares today is that they could offer greater scope for growth than they’ve done over recent years. In many cases, high-quality businesses are trading at low prices because they face weak trading conditions in the short run. This means that investors can purchase such companies at low prices, which can be a means of achieving higher capital returns as they recover.
Although a recovery is never guaranteed, the past performance of the stock market suggests it is very likely. The FTSE 100 and FTSE 250 have always posted new record highs following their previous downturns. The same outcome seems very likely as the world economic outlook improves and investor sentiment returns to previously high levels.
This may translate into impressive returns for investors who have purchased bargain British stocks after their recent declines.
Impressive return prospects
Cheap UK shares could produce higher returns than the wider market over the coming years. For example, the FTSE 100 and FTSE 250 have rebounded after the market crash. They may not have fully recovered, but they are significantly higher than they were in March.
However, some British stocks continue to trade 30-50% down on where they were at the start of the year. They remain unpopular among investors as a result of weak trading conditions or uncertain outlooks in many cases. Where they have solid financial positions and competitive advantages over their peers, they may represent excellent buying opportunities.
Over time, they could outperform the wider stock market and improve your prospects of retiring on a growing passive income.
Making a passive income in retirement
Even if cheap UK shares match the stock market’s return, you could end up with a large ISA portfolio in retirement that produces a worthwhile passive income.
For example, the FTSE 100 has returned around 8% per annum, including dividends, since its inception in 1984. Assuming the same return in future on a £200 monthly investment would produce a nest egg valued at around £413,000 over a 35-year timeframe. From this, a 4% withdrawal would mean an annual passive income of around £16,500.
As such, now could be the right time to buy a selection of cheap UK shares and hold them over the coming years. Their long-term growth potential could improve your financial outlook and retirement prospects.
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.