UK stocks haven’t had quite the drubbing in 2022 as shares have across the pond. Nonetheless, I doubt most investors are truly enjoying the current market conditions. So is now the time to buy? I believe it is.
Think of your favourite retailer. If I told you it was offering a big discount on its wares, you’d probably be first in the queue. The strange thing about human behaviour is that many/most of us forget this way of thinking when shares go ‘on sale’.
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This is understandable — big market moves can be scary. However, it’s not a mindset for getting rich. That’s why I’m reframing this sticky patch as an opportunity to snap up quality shares on the cheap.
Another reason I’m buying UK stocks now is for the dividends. This passive income will help to soothe the pain of my portfolio temporarily dipping in value.
The danger of buying UK shares now
Sadly, no one knows whether we’ve already seen the bottom. With fears of a recession, earnings at some companies could tumble. Foreign secretary Liz Truss has also warned that the conflict Ukraine could last “a number of years“. There’s not a lot of happy news out there.
As great as they are, dividends can’t be guaranteed either. When times are tough, companies often need to reduce payouts to investors… or cut them completely.
Thankfully, there are ways of mitigating these risks.
How I’m reducing risk
First, I can take advantage of volatile prices via ‘pound-cost averaging’. This is when I gradually build a position in a company or fund by buying in (potentially equal) installments rather than in one go. If markets continue to fall, my money will simply go further.
Second, I can spread my cash across different sectors. So I might buy shares in a utility company, a consumer goods firm, a housebuilder, and so on. Since different parts of the market won’t all perform the same (look at energy stocks in 2022!), this should stop me from panic-selling. It also means I should be able to withstand the odd dividend cut. Alternatively, I could buy a cheap exchange-traded fund that tracks an index like the FTSE 100 and gives me all the diversification I need.
Third, I’m avoiding anything speculative. Yes, these shares could rocket when confidence inevitably returns. However, some blue-sky companies could also go bust in the meantime. Instead, I’m focusing on quality businesses that have proven resilient during previous economic crises.
Just go with it
A final way I’m dealing with risk is to simply accept it, buy what I want, and then switch off from the market chatter. There will never be a completely safe time to invest. Mr Market doesn’t ‘do’ peace and quiet. However, lots of academic evidence suggests shares will outperform everything else in the long term. That’s good enough for a Fool like me!
Not the best time
The reason Warren Buffett’s advice to “be greedy when others are fearful” is trotted out by commentators so often is because it’s been proven to work time and time again. Accordingly, I believe now is definitely a great moment for me to buy UK stocks if I follow the strategy mentioned above.
It might not be the best time, but it doesn’t need to be.