The stock market crash means there are a number of dirt-cheap UK shares available to buy today. While they may face uncertain operating conditions in the short run, over the long term, they’ve the potential to produce a surprisingly large retirement nest egg as the world economy recovers.
By contrast, low interest rates mean that saving money for retirement could lead to a loss of spending power. As such, now may be the right time to buy and hold FTSE 100 and FTSE 250 stocks for the long run.
The past performance of UK shares versus savings
The recent performance of UK shares has generally been disappointing. In many cases, they’re down versus their 2020 starting prices. Cash savings, meanwhile, are likely to have grown in value this year, albeit at a slow pace due to low interest rates.
However, over a long a long time period, a portfolio of FTSE 100 and FTSE 250 shares is likely to have outperformed savings accounts. For example, the two indexes have delivered high single-digit annual returns over the past 20 years.
Compared to the sub-1% interest rates currently on offer among the vast majority of savings accounts, this means the stock market can have a far more positive impact on an investor’s retirement plans versus cash savings.
The future prospects for a stock market rally
Looking ahead, the difference in returns between UK shares and cash savings could widen even further over time. Interest rates are likely to remain at low levels for many months, or even years. The Bank of England is even considering negative interest rates to stimulate an economic recovery after the coronavirus pandemic is over.
As such, the interest received on cash savings may even be less than inflation. This could reduce an investor’s spending power as retirement nears.
Meanwhile, the existence of dirt-cheap UK shares means many stocks could deliver higher returns than the stock market average. They may currently have valuations that don’t reflect their financial position or future earnings prospects.
Moreover, valuations across the stock market have historically reverted to their long-term averages. This suggests that, as a stock market recovery takes place, today’s cheapest stocks could be the biggest beneficiaries of improving investor sentiment.
Reducing risks from buying shares
Of course, UK shares are riskier than holding cash. This year included a bear market that’s likely to recur at some point in future. However, by diversifying across a wide range of shares and holding for the long run, it’s possible to reduce risk.
This could also increase returns as an investor has a broader exposure to a range of growth areas. It could also catalyse their retirement prospects as a likely stock market rally takes place over the coming years.
