The stock market crash in March is part of history. The FTSE 100 dipped and closed below 5,000 points on March 23, before rallying. Yet as we look at things in August, there still hasn’t been a full market recovery. The FTSE 100 trades around 6,000 points, still a long way off where we started the year. This means there are cheap UK shares still out there that make good buys for any ISA allocation you still have available.
Using an ISA to help early retirement
An ISA is a great tool for stock investors, regardless of your objective. It simply allows you to house your stocks in a tax-free wrapper, with an allocation that resets each year. Currently it’s set at £20,000. The ISA can aid early retirement because of the capital gains tax money which you’ve been able to keep. If your portfolio made 10% this year, then the £2,000 profit would normally mean £100-£200 in tax. If you compound this tax saving over multiple years and multiple allowances then it can really start to add up. This tax saving from the ISA can run into five-figures, certainly enough to speed up your retirement plan.
Cheap UK shares to invest in
Let’s say you’ve got your £1,000 ready to go. You could just invest in a FTSE 100 tracker fund with the full amount. This wouldn’t be my suggestion, simply because not all shares look cheap to me right now. Some stocks within the FTSE 100 actually look overbought and so I’d stay away from them.
The bonus of actively picking a few good cheap UK shares to invest in is that you can hopefully outperform the market. After all, a tracker is essentially an average of all 100 stocks. If you can buy half a dozen top performers, you’ll easily beat the return of the index.
There’s no guarantee of this, but doing your homework on particular shares definitely helps. For example, I recently wrote a piece on Rightmove. I’d still call it cheap because the share price remains 12% lower than the highs seen this year. I’d also call it a good share to allocate some money to due to the bounce already being seen in the property market. The cut in stamp duty and the easing of lockdown have allowed buyers and sellers to become active again. As an online portal connecting the two parties, Rightmove is a natural benefactor here.
At a broader level, you can look for cheap UK shares yourself using a short checklist. Primarily, look for firms with low price-to-earnings ratios. Also look at firms trading with low price-to-book ratios. Both metrics look at the current share price and compare it to the company specific financials (earnings or book value). If these are at historic lows, then you’ve got a stock that you can classify as cheap, at least from one point of view.
A second stock market crash?
A lot of people have been saying they’ll wait for a second stock market crash before buying cheap UK shares. I’m not so sure, as you don’t want to miss the boat. These shares are currently cheap, and so I don’t see a reason to be greedy and wait for even better levels that might never happen.