As unpleasant as stock market corrections can be, they’ve historically created some of the best buying opportunities for investors. With widespread pessimism driving down valuations of even superb companies, plenty of stocks continue to trade at discounted prices. But this rare event may soon be coming to a close.
With the global economic outlook improving and the UK set to avoid a recession, thanks to cooling inflation and stabilising interest rates, a recovery may already be underway.
The FTSE 250 is already up by double digits since October. It still has a long way to go to make a complete recovery. Yet the index is on the verge of signalling the start of a new bull market.
If that’s the case, then capitalising on cheap top-notch stocks today could be a last chance for some investors to build a £1m ISA.
Understanding corrections
Like many industries, the stock market operates in cycles. There are periods of spectacular growth like we saw between 2009 and 2021, as well as frustrating ones like in 2022. Crashes and corrections are a natural part of an investing journey. And while unpleasant to experience, they also provide prudent long-term investors with an upper hand.
It’s no secret that buying low to sell high is a proven recipe to build stock market wealth. And while there are always new opportunities created every day, having such widespread bargains to pick from is pretty rare. If we ignore the short-lived 2020 Covid crash, the stock market flourished for 14 years before the 2022 correction.
Another severe market downturn is guaranteed to happen again. But there’s a giant question mark in regards to when. And if we’re on the verge of another impressive 14-year bull run, 2024 may be the last chance for some investors to capitalise. After all, those approaching retirement in the next few years may find equities to be an unsuitable asset class to capitalise on in 2038.
Building a £1m ISA
Thanks to compounding, it doesn’t take that much capital each month to build a seven-figure portfolio, given sufficient time. Looking at the FTSE 100, investors have reaped an average annualised return of 8%. And assuming these gains are replicated, maximising an ISA allowance at this rate would translate into a £1m portfolio in roughly 20 years.
But by capitalising on bargains at the start of the 2024 recovery, investors may be able to reap even better returns. Even if it’s just an extra 2% a year, that’s enough to cut two years from the waiting time.
Understanding the risks
Sadly, investing holds no guarantees. Even the world’s greatest stock pickers can see their portfolios tumble should the macroeconomic environment decide to throw a spanner in the works. And just because the stock market has been on a solid run recently doesn’t mean the long-awaited recovery has actually started.
As such, it may be wise to expect further volatility ahead. Employing tactics like diversification and pound-cost averaging could be a smart way to counteract this threat. But even with this strategy, investors may still end up with considerably less than expected after two decades.
Nevertheless, given sufficient time, a well-built, intelligently-managed portfolio is likely to deliver wealth-building gains. And that’s why I believe the risk is worth the potential reward.
