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How I’d invest £20k in this stock market crash to retire early

The 2020 stock market crash has unlocked some incredible opportunities for investors. Buying undervalued equities in a Stocks and Shares ISA or SIPP offers some of the best opportunities to get rich and retire early.

That is, if you’re willing to buy sound businesses cheaply and wait until their true value is realised. This requires foresight and not a little patience.

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But choose wisely and hold fast, and I believe you can sit back and watch as your portfolio value rises.

Undervalued

Now could be the perfect time to invest in a diverse range of FTSE 100 and FTSE 250 stocks to take best advantage of value for money. Buying when share prices are relatively cheap could improve your chance to retire early.

It’s true that some shares have recovered a little from the late February stock market crash. However, there is still a significant disconnect between the true value of many quality FTSE 100 and FTSE 250 companies and their current share prices.

Vanguard investing giant John Neff has advised that picking underdogs was the best way to get rich and retire early. “It’s not always easy to do what’s not popular, but that’s where you make your money,” he says. “Buy stocks that look bad to less careful investors and hang on until their real value is recognised.”

Stock market crash value

One of the reasons Neff’s investments beat the market is his decision to pick overlooked and undervalued stocks. A simple way we can emulate him and have a decent shot at retiring early is to look at shares with relatively low price-to-earnings (P/E) ratios. The FTSE 100 market average is 14.6, while the FTSE 250 is 13.

Stocks and shares with P/E ratios below this number are cheaper than average. If we then look at the quality of their sales and revenue to see how they might perform in future, we can discern whether they are undervalued.

Remember: at any time the market might significantly undervalue high-grade FTSE 100 and FTSE 250 shares. The stock market crash of 2020 has made this list longer than usual too. So our chance to retire early on our Stocks and Shares ISA or SIPP portfolio alone is greater now than at any recent point in history.

P/E, P/S = Profit

To get started I would be looking at high-quality companies that are trading at low P/E ratios, combined with low P/S ratios — that’s the share price compared to sales. The lower the P/S ratio, the more attractive the investment is. Generally anything under 1 is considered undervalued.

These are the companies most like to to be able to trade strongly out of the stock market crash and into the future. And then, for the market to realise their true value, as John Neff reminds us.

In the FTSE 250, I think that’s companies like Drax (P/E 8.2, P/S 0.21) and Ferrexpo (P/E 6, P/S 0.86).

In the FTSE 100 I would be looking at the likes of Royal Dutch Shell (P/E 9, P/S 0.38) and Barclays (P/E 8, P/S 0.86). It’s certainly true that these share prices are cheaper than at any point in recent history.

The desire to retire early is common, but the route there is uncommonly hard. That is, unless you are willing to follow these time-tested investing principles, in my view.

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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.