As horrific as it has been to watch the FTSE 250 index fall by over 26% since the start of 2022, the ongoing stock market correction presents a rare opportunity. I could set my Stocks and Shares ISA up for long-term success.
The latest round of volatility surrounding the value of the pound and pensions has put many investors on edge. But while these macroeconomic factors are concerning, the root cause of concern stems from higher inflation.
With more early indicators emerging that inflation is beginning to wane, UK shares enjoyed a small rally earlier this week. And while there remains plenty of uncertainty, it’s not unreasonable to assume the stock market recovery could be drawing near.
If true, then the window of opportunity to capitalise on cheap stock valuations could be closing for me.
Getting rich?
History has proven countless times that investing in high-quality stocks when prices are plummeting can lead to jaw-dropping returns over the long term. But these opportunities are actually quite rare. In fact, we’ve only seen three massive stock market declines in the last 20 years.
Many UK shares are falling today. Yet on closer inspection, plenty of the businesses being sold off are actually resisting inflationary pressures admirably. And even more firms have had operations disrupted yet also own sufficient resources to weather the storm.
Subsequently, finding top-tier companies trading at dirt-cheap price tags has become far easier than usual for long-term investors.
Capitalising on these opportunities with my Stocks and Shares ISA could propel my portfolio closer to my £1m milestone. And thanks to its tax-efficient status, none of my gains would end up lining the pockets of the UK treasury.
If I invest £500 monthly into high-quality stocks consistently and replicate the 11% historical average return of the FTSE 250, my portfolio would reach £1m within less than 28 years. That’s not guaranteed, of course. But by capitalising on the dirt-cheap valuations today, hitting a higher return is less challenging than normal. This could possibly enabling my nest egg to grow into the seven-figure range years faster.
Investing is never risk-free
Putting money into the stock market during a time of crisis requires patience. In the short term, volatility can send even the best UK shares into the gutter. That’s especially true if another spanner gets thrown into the works from unpredictable sources.
Take XP Power, for example. It was once a darling electronic component manufacturer. The stock price was hit hard by short-term supply chain disruptions, creating what looked like a buying opportunity. But now it’s been landed with a $40m fine for encroaching on a competitor’s trade secrets, sending the share price down even further.
This goes to show how critical diversification is for my Stocks and Shares ISA, especially during a stock market correction. Similarly, even if I can identify amazing businesses at cheap prices, that doesn’t mean the stock won’t fall further due to heightened volatility.
By spreading my buying activity over several weeks, or months, I potentially have the option to invest more in a terrific business at a better price down the line.
This tactic is called pound-cost-averaging, and just like diversification, it’s a simple but powerful method of keeping risk in check.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.