The ongoing stock market correction has created quite a catalogue of UK shares trading at seemingly dirt-cheap prices.
For some, the drop in market capitalisation may be justified. After all, we’ve just had a decade of near-zero-percent interest rates. And many FTSE 100, as well as FTSE 250 companies, overleveraged themselves, making the impact of rising interest rates cataclysmic.
Yet the spike in stock market pessimism this year hasn’t discriminated. Consequently, it’s not just low-quality shares being hammered into the ground but top-notch enterprises as well. And as every long-term investor knows, buying a terrific business at a fantastic price is a proven recipe for wealth generation.
UK shares vs panicking investors
Since the start of the year, being a shareholder has undoubtedly been tough. The FTSE 100 has shown some resilience, only dropping by around 7%. Yet the same can’t be said for the FTSE 250, which is down a whopping 28%!
The latter index consists of smaller businesses with fewer resources to weather today’s economic storm. So the stark contrast in price performance for these UK shares is hardly unexpected. And we’ve already seen some businesses like Cineworld’s collapse in the wake of rising interest rates.
But does that mean every company on the London Stock Exchange is doomed? Certainly not.
We’ve been through corrections and crashes before. And on every occasion, the stock market has eventually recovered before reaching new record highs.
As the UK’s economic outlook slowly improves in the long term, so will investor sentiment. And for the individuals who bought undervalued high-quality shares, this return of optimism can translate into spectacular portfolio returns.
Portfolio risk management
Buying UK shares during a stock market correction might be the key to unlocking wealth. But that doesn’t mean it’s risk-free. Even the best businesses today are still at risk of failing if another unpredictable spanner is thrown into the works.
Therefore, putting all my eggs in one basket is probably not a sensible investment decision. Instead, diversifying my capital across multiple UK shares that I’m confident will thrive during and after the stock market recovery will likely yield the best results. That way, should one company fail, the damage to my portfolio is mitigated.
Furthermore, while I can confidently say that a stock market recovery is on its way, its anyone’s best guess when it might start. And suppose inflation continues to worsen in the meantime? In that case, it could continue to send stocks firmly in the wrong direction, creating more undesirable volatility.
Further buying tactics like pound-cost-averaging can help reduce the level of risk exposure. But even with these strategies deployed, it may be impossible for me to avoid risk entirely.
Yet if I have patience, buying the best, cheap UK shares in November while investor sentiment remains weak could propel my portfolio to record levels in the long run.