It’s been a rocky past year in the stock market. In the FTSE 100, only 29 stocks have gained during this period. With a European war, inflation, rising interest rates and political uncertainty, UK shares have struggled to soar higher. Yet I don’t see this as a negative due to my long-term investment timeframe. In fact, here’s why I think I’m in a once-in-a-lifetime opportunity to buy on the cheap.
Strong demand within the stock market
One reason I’m buying now is because I don’t think there’s much risk of a market crash in 2023. This is because even though interest rates are rising, they’re still at historically low levels.
I think a lot of people will continue to buy stocks because of the potential returns versus leaving money in cash. I might be able to pick up 3% in a Cash ISA, but no more than that. Investors will likely continue to allocate money to the stock market in pursuit of above average returns.
Why is this more of a once-in-a-lifetime occurrence? Well, if I look back to the market crashes in 1987 and 2008, interest rates were significantly higher. In the UK, the interest rate was around 5% in 2008 and above 10% during periods in the 1980s. During those times, sitting in cash looked appealing for more people.
The bottom line is that I feel the risk of another market crash is lower now as more people are happy to keep buying shares as an alternative to picking up a relatively low interest rate on cash balances.
Pessimism on UK share valuations
Another reason why I think now is a smart time to buy stocks is due to some cheap valuations. A good way I analyse this is via the price-to-earnings ratio. It compares the current share price to the latest earnings per share figure. The lower the figure, the more likely it is that the stock is undervalued.
Over time, this value should move back to a fairer figure (usually around 10-15). The negative investor sentiment for much of this year means that some shares have a low P/E ratio. These are the value stocks that I want to buy now.
For example, Lloyds Banking Group currently has a ratio of 6.06. The insurance giant Aviva is at just 4.93. Finally, BT Group is at 8.3. I could highlight more options, but this sample helps to show that some large, mature companies are trading at attractive levels.
As a note, I should be aware that sometimes stocks can remain undervalued for several years.
How it helps me to retire early
By putting my money to work now, I’m aiming to retire at 55. My strategy is to invest more during periods of uncertainty in undervalued stocks, like now. This should help my average return to be higher than if I simply invested during market boom periods.
Clearly, the future is unknown, and my key risk is that we face an unpredictable future global disaster that causes a deep recession.
Yet by building my investment pot now, it has the chance to compound returns in the coming decades. So, by the time I reach 55, I hope to have a large enough pot to be able to be able to support my retirement lifestyle.
