Investing in shares can be a volatile experience. But, looking back, a stock market recovery has always followed a crash or correction. In fact, it has a 100% success rate at bouncing back before climbing to new highs.
Knowing when our current predicament will end is anyone’s guess. The recovery may have already started. Regardless, plenty of high-quality companies are now trading at dirt-cheap discounts. Buying while they’re down, and holding them for the long term, could lead to substantial returns for my portfolio.
Profiting from the eventual stock market recovery
With inflation reaching record highs, interest rates being boosted, a labour shortage, skyrocketing energy bills, and now political uncertainty, the UK economy isn’t exactly in the best position for growth. And, subsequently, investor sentiment is probably at its lowest point since the financial crisis.
A slowdown in consumer spending creates a lot of uncertainty in the short term. And the vast majority of the investing community tends to panic under such conditions. Hence why we’ve seen the sell-off over the last six months. But is there a genuine reason to be worried? That depends.
The problems we’re facing today all boil down to a restriction on money supply. Existing and new debt is getting more expensive, and raising money through equity is becoming less viable. So life is about to get really tough for businesses with weak balance sheets and tiny cash flows.
However, there are also countless wonderful companies that have more than enough liquidity and/or substantial cash flows to make it through this temporary storm. And with their shares currently trading at dirt-cheap prices, the opportunities for my portfolio in the eventual stock market recovery look substantial.
Time is of the essence
Depressed markets can last anywhere from a few weeks to several years. Today, it’s impossible to know how long the ongoing correction will last. And it may have already ended. In other words, today’s dirt-cheap shares may not be so attractive in a few months. That’s why I’ve already started my shopping spree to avoid potentially missing out on one of the greatest investment opportunities seen in over a decade.
However, I’m not throwing everything into equities at once. There is very much the possibility that prices could decline further. And if they do, then the stock market recovery could become an even more lucrative opportunity.
Since timing the bottom requires absurd levels of luck, I’m spreading my bets by drip-feeding capital into high-quality companies over time. With this approach, my average cost per share will drop if prices fall further. Alternatively, if stocks start recovering, I can still benefit from cheap valuations.
Investing in a weak market can be a volatile and scary experience, especially for new investors going through the process for the first time. But, long term, it can radically accelerate the wealth-building process, inching me closer to an early and hopefully luxurious retirement.