Last year’s correction may have left a bitter taste in investors’ mouths, but it’s also handed over a rare chance to build a seven-figure Stocks and Shares ISA. In 2023, this opportunity seems to still exist as the recovery is far from complete.
Plenty of top-notch enterprises continue to trade firmly below their intrinsic value, with volatility still running wild. And as every investor knows, buying low and selling high is the ultimate recipe for making a fortune. Acting now could even pave the way to building a tax-free £1m in an ISA over the long run.
Capitalising on volatility
The recent stock market turmoil is far from the first time such radical drops in valuations have occurred. After all, 2020 saw some pretty extreme shifts and before that, 2008 sent portfolios into a tailspin. But as horrible as these periods were to experience, they share two common characteristics.
The first is that these events, while vivid in memory, aren’t all that common. In fact, severe market downturns like last year only occur once in a blue moon. For reference, in the last 40 years, there have only been five. Meaning that by the time another crash or correction comes along, it might be too late to reach £1m for some older investors.
The second is that regardless of the disastrous economic situation, the stock market always eventually recovered before reaching new heights. And it’s why buying during these unpleasant times can be the key for investors unlocking ginormous piles of money.
Let me demonstrate. When the stock market isn’t throwing a tantrum, indices like the FTSE 100 have historically generated average returns of around 8% per year. Assuming an investor can max out their ISA allowance, at this rate of return, a portfolio can cross into millionaire territory within 21 years. And it would only then take another seven years to double it!
But capitalising on dirt cheap shares today could boost this average return significantly. Even if a portfolio musters just an extra 2% in total average gains, that’s enough to wipe out a year from the waiting time to hit £1m and over two years from hitting £2m.
Risk versus reward
Becoming a multimillionaire in two decades is exciting. Even more so for those who’ve just kicked off their careers. Apart from providing a more luxurious lifestyle, it opens the door to an early retirement.
Sadly, it’s not guaranteed as investing in the stock market can carry significant risks that investors must consider. For starters, 20 or so years is plenty of time for another crash or correction to occur.
This means new buying opportunities can emerge. But depending on the timing of such events, it could steer a portfolio way off course. And an investor may have significantly less than expected when the time comes to cash in.
What’s more, cheap shares today could be about to get even cheaper. There’s still lots of uncertainty surrounding the British economy. And further deterioration of conditions could undo much of the recovery progress made so far this year.
Fortunately, tactics like diversification and pound-cost averaging can help. While these strategies can’t eliminate investment risk, they can mitigate it. Admittedly, this is not a once-in-a-lifetime opportunity, but given the potential rewards, investing in 2023 is worth it, in my opinion.