UK shares have had a bit of a wobbly month so far, with leading indices like the FTSE 250 tumbling more than 7% in the space of a few weeks.
October has a habit of being a poor-performing month due to the timing of mutual fund fiscal years. As a quick reminder, most investment funds end their reporting period during the Halloween season. And to offset any capital gains tax, losing positions are typically sold off before being repurchased a few weeks later in the new fiscal year. That’s why November tends to outperform by comparison.
This is known as the October Effect. And prudent investors can capitalise on this fairly consistent volatility to snap up some bargains. Even those with little-to-no retirement savings can use this handy volatility to propel them upwards.
Finding cheap shares to buy
Finding undervalued companies in a volatile market is far easier than when conditions are calm. That’s because emotional decision-making can send even terrific enterprises in the wrong direction. And when a firm starts to trade significantly lower than its historical price-to-earnings ratio (P/E), a bargain might have just materialised.
Therefore, the first place I’d start when hunting for buying opportunities is among the worst-performing shares in October and 2023.
Of course, investing always requires some nuance. And a discounted valuation may be well deserved if there’s a fundamental problem with the underlying business. Investors need to carefully examine each candidate for their portfolio to verify such thesis-breaking situations don’t exist.
Investing for retirement
For an investor at 45, there’s still another 15 years of compounding to capitalise on, assuming that they’re planning to retire at 60. That’s certainly plenty of time to build a significant pension pot, even with modest sums.
In fact, let’s say a hand-picked portfolio successfully manages to replicate the FTSE 250’s 11% average annual return. In that case, investing just £500 a month for this 15-year period will accumulate around £227,345 in wealth. And this pension pot could be worth around £50,000 more if the portfolio beats this benchmark by just another 2%.
However, there are some caveats. 15 years is a long time horizon. But it may be prohibitive for some investments. For example, imagine a young biotech firm in phase 1 clinical trials. Let’s ignore the general risks of such a company for a moment. Even if everything goes according to plan, it could be at least a decade before any products reach the market, leaving a much smaller period for the firm to actually start building value for investors.
In other words, investors nearing retirement may want to consider firms that have already proven themselves. Apart from reducing company-specific risk, it could also help eliminate some volatility exposure seen throughout the year.
Of course, this is likely a more boring experience. But there are plenty of dull businesses that have yielded tremendous results. One example from my portfolio is Safestore. The self-storage company has steadily grown its cash flow to the point where dividends are now 420% higher than a decade ago, producing a 50% annual yield for me on an original cost basis!
