The thought of buying cheap shares in 2023 versus gold doesn’t sit well with some investors. After all, inflation in the UK is proving to be somewhat stubborn, causing some to speculate that the worse is yet to come. That would certainly explain why the price of gold has continued its upward trajectory so far this year.
The shiny yellow metal is a proven inflation hedge. And for those seeking to protect their wealth, gold may be the sensible choice in these uncertain times.
However, historically, it’s been a pretty terrible investment for those seeking to grow wealth. At least in comparison to the stock market that’s, on average, delivered around 10% returns each year. And this level of return can be further maximised by those capable of finding high-quality UK shares trading at discounted prices.
Under normal circumstances, finding undervalued buying opportunities requires a lot of skill and nuance. But when stocks are moving erratically as investors act on emotions over logic, finding bargains becomes far easier.
With that in mind, let’s explore some strategies investors can use to capitalise on cheap shares today.
Don’t try to time the market
All too often, novice investors try to accurately time moving capital from one asset class to another. The idea is to shift money into something like gold when times are tough and then shift back into cheap shares when the market hits its bottom.
On paper, this sounds like a sensible strategy. In practice, it’s a well-known method to set money on fire. Unfortunately, timing the market is near impossible. And while a few stories emerge each year of analysts correctly calling the bottom, most of the time it’s down to pure luck mistaken as skill.
Moving in and out of asset classes incurs trading costs. But more importantly, tremendous amounts of money can be left on the table if an investor is late repurchasing shares or sells right when things start to turn around. And, of course, there will be no way of knowing this mistake until several months after the fact.
Buy cheap shares over time
As counterintuitive as it sounds, holding on during times of volatility, even when valuations are plummeting, is usually the best course of action. And for those with the capital to spare, injecting additional capital steadily over time can lead to superior returns in the long run.
This is known as pound-cost-averaging. The idea is to buy cheap shares in small chunks over several months. That way, if the share price continues to drop, an investor can capitalise on an even better price, bringing the average cost per share down.
Of course, this isn’t just a case of buying up every beaten-down business. Even in volatile markets, sudden drops in share prices can be justified. Therefore, investors need to investigate whether a stock is cheap for a good reason.
But if the business remains fundamentally sound, and the long-term strategy is uncompromised, then now might be the perfect time to start loading up a position at discounted prices.
