My Stocks and Shares ISA plunged into the red this year as UK shares took quite the tumble. The recent volatility has dragged indices like the FTSE 250 down by double digits. And it’s undoubtedly persuaded many investors to retain their cash in a savings account.
But savings accounts are still only delivering average interest rates of less than 1%. And with inflation at 8.8%, retaining cash isn’t providing any meaningful protection against inflation. That’s why, as backwards as it sounds, buying shares today could be the wiser move in the long term.
The stock market has a multi-century track record of suffering through crashes and corrections. Yet, without fail, every period of downturn was eventually followed by a recovery before reaching new highs. And immense wealth has been generated for the investors prudent enough to spot the buying opportunities created by volatility.
Using a Stocks and Shares ISA to capitalise on downturns
Given the 100% success rate of recovery, I’m confident that the stock market will start climbing again. But when that happens is anyone’s best guess. In the meantime, volatility in UK shares will remain, making them a risky place to put capital to work. At least in the short term.
It’s important to note that while the stock market, in general, may be destined to recover, that doesn’t mean every beaten-down business will do the same.
Inflation, supply chain disruptions, interest rates, and countless other macroeconomic factors create substantial hurdles. And some corporations may be unable to adapt or survive. In fact, we’ve already seen FTSE 250 companies, like Cineworld, head for bankruptcy.
But the firms with strong balance sheets, talented leadership, and wide competitive moats are more likely to be able to weather the storm before thriving once more.
With most investors panic-selling without thinking about the long-term potential, plenty of high-quality UK shares are now trading at substantial discounts. And by executing and holding these investments within a Stocks and Shares ISA, all my potential capital gains and dividends are immune to the grubby fingers of the tax man.
Generating returns with UK shares
History has shown countless times that UK shares can consistently deliver higher long-term returns than alternative asset classes like bonds. For example, the FTSE 250 index in the last 20 years has achieved a 9% annualised return, and that’s even after going through multiple price corrections and two stock market crashes.
Investors who simply held on during these challenging periods have likely outperformed those who didn’t. By taking advantage of low stock prices during economic turmoil, these investors were also able to bolster their portfolio performance further. And by holding their positions in a Stocks and Shares ISA, none of the profits were lost to taxes.
