Despite the recent stock market rally, a number of UK shares continue to trade at prices that suggest they offer capital growth potential.
In fact, the FTSE 100 and FTSE 250 have yet to fully recover from the 2020 stock market crash. As such, there may be opportunities to buy high-quality companies while they offer wide margins of safety.
Over time, they could produce impressive returns. They may even increase an investor’s chances of making a million.
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Buying high-quality UK shares at cheap prices
As ever, a strategy of buying high-quality UK shares at cheap prices could be a logical means of benefiting from a likely long-term stock market rally. After all, buying any asset at a low price provides greater scope to generate high returns in the long run. And through purchasing high-quality companies, an investor may have a greater chance of surviving the short-term economic difficulties that are present.
Therefore, companies with low debt levels, significant competitive advantages and the potential to benefit from industry trends could be relatively attractive. They may offer a means of capitalising on the improving economic conditions in 2021 that could lead to stronger investor sentiment towards a wide range of FTSE 100 and FTSE 250 shares.
Investing in a broad range of companies for the stock market rally
Of course, many UK shares may fail to post impressive returns even in a stock market rally in the coming years. For example, they could struggle to adapt to changing industry conditions, or may face unforeseen problems that hold back their financial performances.
Therefore, it is logical to build a diverse ISA that reduces an investor’s reliance on a small number of companies for their returns. Diversification can mean less risk, as well as higher returns, because it provides investors with access to a broader range of growth opportunities. With the FTSE 100 and FTSE 250 containing companies operating in a wide range of countries and industries, it is possible for almost any investor to achieve a diverse spectrum of businesses within their ISA.
Making a million from a market recovery
Of course, making a million in a stock market rally from a portfolio of UK shares may sound implausible at the present time. Risks such as coronavirus are ongoing, while the near-term economic outlook is challenging.
However, history suggests that a simple buy-and-hold strategy that focuses on high-quality companies trading at low prices can be very successful. Even achieving the market rate of return of 8% per annum would turn a £100,000 investment into £1m within 30 years. However, through buying a wide range of FTSE 100 and FTSE 250 stocks ahead of a likely stock market recovery, it is possible to outperform the market to produce higher gains that return a £1m ISA even sooner.
