With the stock market seemingly in a prolonged dip, buying cheap UK shares is not exactly a proposition many investors find enticing at the moment. The rise of inflation and interest rates doesn’t paint a bright economic future. And with fears of a recession on the horizon, a stock market crash could be just around the corner.
Yet despite the seemingly counter-intuitive nature of buying shares when prices plummet, this has historically been one of the best wealth-building decisions to make. And for someone like me with limited retirement savings, the current stock market correction could be the perfect way to jump-start the long-term wealth-building process.
To quote Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful”.
Investing in Cheap UK shares
There are countless examples of crashes, corrections, and downturns in the world of investing. And the one thing they all have in common is that the stock market always recovers.
That doesn’t mean every business will make it through the storm. There are plenty of stocks facing peril today. Rising interest rates mean debt is getting more expensive, putting enormous pressure on profit margins for over-leveraged firms. Similarly, the companies dependent on external financing to keep the lights on are also in for a tough time as lending and equity activity gets more restricted.
But for the proven businesses with strong balance sheets and a wide competitive moat, a recovery seems more likely than not. As such, buying high-quality UK shares today while they’re cheap may generate a long-term nest egg. Just take a look at what happened with Smith & Nephew in 2008. The share price was slashed almost in half in a matter of months. Yet investors who used the collapse as a buying opportunity have now more than tripled their money. And that doesn’t even include the income generated from dividends.
Saving for retirement
In the short term, buying UK shares, even the cheap ones, can be a volatile experience. But this short-term volatility often ends up looking like nothing more than a blip in the long run.
There are plenty of asset classes out there suitable for retirement savings. Bonds are arguably one of the most popular due to their low-risk nature. Yet they’ve proved to be a poor source of wealth over the last decade, thanks to low interest rates.
That might soon change now that interest rates are on the rise. But I’m sceptical that this asset class can outperform the average 8% annualised return provided by the British stock market. Even investing a small amount of capital into UK shares can generate significant wealth over the long term.
To demonstrate, investing £500 each month at a rate of 8% for 30 years will build a portfolio worth just under £750,000. By comparison, 30-year UK government bonds currently yield 2.6%. At this rate, my portfolio would only reach a value of £272,000 over the same period.
This gigantic difference is why I personally believe the added risk of investing in equities is worth me taking. And by using a tax-efficient trading account like a Stocks and Shares ISA, my retirement savings can also be protected from the tax man’s grubby fingers.