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The 2022 stock market correction has created a rare opportunity to generate wealth and get rich. Collapsing share prices might not feel like a positive right now, but the depressed nature of stocks has created countless opportunities.
Finding opportunities
The FTSE 100 is hovering around 7,500, but that doesn’t show the whole story. The index has been pulled upwards by resource stocks, while many sectors are struggling.
Firms in retail, housing, banking among other areas have suffered in the evolving recessionary environment. This is especially the case for stocks that are more UK-focused.
Face by a tough operating environment, investors have shifted their attention away from these areas of the market.
But as a long-term investor, I’m not too concerned about the near-term challenges. Yes, I need to be sure the company will survive the forecast recession. However, I’m looking five, 10 years down the line. Maybe even longer.
Buying when the market is down
Under average market conditions, the FTSE 100 index has provided an annual return of around 8%. That’s clearly pretty positive. And if, for example, I were starting from scratching and maxing out my ISA every year, it’d take me 20 years to hit millionaire status.
However, buying during dips can propel my portfolio forward when the market recovers. It’s all about reducing the waiting time. Buying top-class UK shares today while stock prices can help maximise gains as well as minimise losses.
I’m also looking to Warren Buffett for inspiration here. The billionaire investor looks for a margin of safety. For example, if a company trades for £3 a share, but its assets are worth £4 a share, then there is a margin of safety of £1.
Buying discounted stocks helps me form that margin of safety. It can propel my portfolio upwards, but it’s also a defensive tactic.
Where to start?
This all sounds great, but the hardest part is picking the right stocks and choosing the correct investment strategy.
For me, it’s all about compound returns. This is essentially the practice of investing in stocks paying a dividend, reinvesting that dividend and earning interest on my interest. The longer I leave it, the more money I have, as returns grow exponentially over time.
But I still need to buy the right stocks in the first place. Currently, I’m looking at banks such as Lloyds and Barclays. There are several reasons for this. The share prices are depressed because of concerns about the UK economy. But there are some serious tailwinds in the form of higher interest rates and a relaxation of banking regulations. I’ve recently bought more of both for my portfolio.
I’m also starting to reconsider housing stocks. Housebuilders have slumped hugely as interest rates have risen to levels not seen in over a decade. Demand appears to be falling and house prices could slump. But the long-term prospects remain positive. This is definitely a sector I’m keeping a close eye on.
