The UK economy suffered its biggest slump on record as lockdown measures pushed the country officially into recession. However, a recessionary environment can be the best time to invest in cheap UK stocks in my opinion. Temporarily unloved sectors can be filled with stock market bargains.
It may be hard to imagine how just £100 per month could help you get rich and retire early, but investing regularly over a long period of time can have a compounding effect on your investment. Buying cheap UK stocks today could allow you to average a lower price and improve your long-term returns.
Finding cheap UK stocks in a recession
As the economy takes a lurch down, it’s possible to find good quality, cheap UK stocks – many of which may have been rising stars for many decades. The most common place to look is in the FTSE 100, the UK’s leading blue-chip index. However, it is heavily weighted towards banks and oil companies that tend to dominate the index, and as a result isn’t really representative of the wider economy.
I consider the FTSE 250 index a much better place to search for cheap UK stocks. Here you will find more small and mid-sized companies, with a more balanced variety of both growth and value stocks. I believe smaller companies have more potential to become the giants of the future. As the investment veteran Jim Slater once said, “elephants don’t gallop”.
Over the long run, stocks in the FTSE 250 have recovered well from recession lows. For example, over the past 10 years, the FTSE 250 produced an annualised return of approximately 9.1%, including dividends. In comparison, the FTSE 100 returned 7.5% annually, according to my calculations.
Invest regularly in a stocks and shares ISA
Due to the wonders of compounding, seemingly small differences in annual percentage return can add up to a mind-boggling sum. I’d argue it’s important to invest regularly in cheap UK stocks over many years to help you to maximise your retirement pot.
For example, a 20-year-old investor might start an investment today with £10,000, adding just £100 per month, until they reach their expected retirement age of 65. An investment that returns 7.5% per year would produce a total at age 65 of approximately £688,000.
In comparison, an investment that returns 9.1% per year would produce a much larger sum of approximately £1.2m! So how can investing in cheap UK stocks help you to retire earlier?
To demonstrate, let’s assume that you would like to retire with £688,000, which could provide you with an annual retirement income of £28,000. According to my calculations, by investing at an annual return of 9.1%, instead of retiring at 65 you could retire six years earlier at 59.
As shown in this example, an earlier retirement doesn’t need to be too expensive. A starting point of £10,000 plus just £100 per month can be enough, provided you start early. Starting your investment early provides ample time for cheap UK stocks to grow into valuable UK stocks.