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Buying cheap UK shares may not seem to be a sound means of generating high returns after the 2020 market crash. However, the low prices of high-quality businesses could mean they produce impressive capital growth in the coming years.
In fact, they are likely to be a better means of improving your financial situation compared to Premium Bonds or the National Lottery. As such, now could be the right time to build a portfolio of FTSE 100 and FTSE 250 shares to boost your financial outlook.
Low returns from Premium Bonds and the National Lottery
Of course, you may be dissuaded from buying UK shares as other options look superficially more attractive. The potential for Premium Bonds and the National Lottery to provide an instant win that dramatically changes your financial prospects is certainly appealing. However, the chances of them doing so are, unfortunately, extremely low. For example, the odds of winning the National Lottery are around one in 45m.
Similarly, for Premium Bond holders, the chances of winning any prize are around one in 25,000. The typical return from Premium Bonds is 1.4%. This is due in part to the low level of interest rates currently on offer in the UK. As such, the vast majority of holders are unlikely to generate a significant above-inflation return on their capital.
By contrast, the returns from investing in UK shares could be significantly more attractive. The FTSE 100 has seen numerous recessions, downturns and bear markets. But it has produced an annualised total return of around 8% since its inception in 1984. OK, 8% per year may not sound like much. But when it is allowed to compound over the long run it can become a surprisingly large amount.
For example, £10,000 invested in stocks at an annual return of 8% would be worth £217,000 after 40 years. Meanwhile, investing £250 per month over the same time period at the same return would lead to a portfolio valued at around £777,000.
Buying cheap stocks today
Following the 2020 stock market crash, there are attractive buying opportunities across a variety of UK shares in a number of industries. Many companies are currently trading on low valuations due to an uncertain economic outlook. Buying them at low prices may produce market-beating returns in the long run that improves your chances of building a large nest egg.
So now could be the right time to start buying undervalued stocks through a tax-efficient account such as a Stocks and Shares ISA. Do they have the potential for a quick win that makes you an overnight millionaire like the National Lottery or Premium Bonds? No. But buying FTSE 100 and FTSE 250 shares today is likely to be a far more profitable strategy over the long run for most of us. They really do offer great value for money at the moment.
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.