Making a million with UK shares may seem far-fetched, especially after the stock market decided to take a nose dive in 2022. After all, the FTSE 250 tanked by as much as 30%. And even after making a partial recovery, the index is still down by double digits over the last 12 months.
That certainly doesn’t sound all that enticing. However, corrections are actually where some of the best buying opportunities emerge for long-term investors. So much so, that capitalising on bargains today could realistically lead to a seven-figure portfolio with just £500 a month.
Aiming for big money
Since its inception in 1992, the FTSE 250 has been through multiple stock market crashes and corrections. And despite all this turmoil, the index is significantly higher today than it was 30 years ago. In fact, even after the recent market volatility, the average total return generated by the UK’s second flagship index is still roughly 10.6%.
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What’s more, some of the best years in the index’s history followed directly after a crash or correction. Assuming this pattern will repeat, 2023 could be an explosive year now that inflation is getting under control.
But instead of investing in an index fund, what if investors were to pick individual stocks? It’s a far riskier proposition and requires more time, effort, and skill. But a carefully-constructed portfolio of high-quality UK shares bought at terrific prices can vastly outperform an index.
Even if it’s just by one or even two per cent, it can profoundly impact the wealth-building process in the long run. By investing £500 a month at a 12.6% return, an investment portfolio would reach millionaire territory within 25 years. And thanks to the accelerating effects of compounding, holding on for an extra five would boost it to just under £2m.
Investing prudently
As exciting as making £2m sounds, there are some caveats to consider. First and foremost, three decades is a long time. And multiple market crashes and corrections will likely rear their ugly heads. These unpleasant situations will undoubtedly create fantastic buying opportunities like today. But depending on their timing, an investor could have considerably less than expected.
Furthermore, securing a 12.6% average annualised return with UK shares isn’t easy. In fact, most professionally-managed mutual funds fail to reach this threshold. There are many reasons why this is the case, but it essentially boils down to a lack of patience.
Fund investors often jump ship as soon as performance starts to wobble. And the same applies to novice stock pickers. It’s important to remember that shares represent a piece of a business. And businesses operate in cycles.
Every once in a while headwinds emerge, leading to slowing growth and a dip in share price. During a stock market correction, this frustrating situation happens en masse. And it’s up to the stock picker to investigate what’s actually going on.
Has a fundamental issue emerged that’s compromised the business model? Or is it just a short-term problem that will eventually be ironed out? If it’s the latter, and the company’s balance sheet is robust enough to weather the storm, a buying opportunity may have just emerged.
Investing during volatility is inherently risky. But by investing prudently and keeping emotions in check, unlocking superior returns can lead to tremendous wealth.
