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After the stock market threw a rather impressive tantrum in 2022, dirt cheap UK stocks seem to be everywhere, especially in the FTSE 250.
Good common financial advice is to always save some money for retirement. But with interest rates so low for more than a decade, savings accounts haven’t provided spectacular returns. In fact, even after the recent round of interest rate increases, the average interest rate offered by UK savings accounts still stands at a paltry 0.85%.
Of course, compared to the FTSE 250’s 20% drop last year, that’s quite desirable. And it perfectly demonstrates the power of keeping money in the bank versus the stock market during economic downturns.
However, when zooming out to periods of several decades, keeping all the money in the bank may not be a sensible idea. Why? Because even with the stock market correction of 2022, the ‘Covid-Crash’ of 2020, the financial crisis of 2008 and the dotcom bubble of 2000, the FTSE 250 index has still generated an average return of 10.6% since its creation in 1992.
Over the long term, investing wisely in UK stocks is a proven method of creating substantial wealth. And historically, the stock market has performed its best right after a crash or correction. In other words, today’s investors have a rare opportunity to capitalize on fantastic buying opportunities.
What are the best UK stocks to buy today?
But not every business hit is a bargain. In fact, many companies have been sold for good reasons. Therefore, investors simply buying the cheapest stocks they can find are likely to destroy wealth rather than create it.
Instead, the focus should be on finding high-quality companies that are simply experiencing short-term disruption. If a balance sheet is riddled with debt and there isn’t enough capital to meet short-term liabilities, it’s probably a good idea to run in the opposite direction. Similarly, a collapsing stock price may be fully justified if the business model has been compromised and cash flows have been disrupted.
On the other hand, if a company’s financial health is intact and growth is simply slowing as a result of economic headwinds, then it may warrant further investigation.
Clearly, weeding out weak, over-leveraged businesses is only the first step in a critical line of inquiry. However, this filter can quickly remove UK stocks that are likely to be bad investments from consideration.
Creation of a retirement fund
As mentioned above, the FTSE 250 has historically generated average annual returns of 10.6%. And by capitalizing on depressed valuations today, investors could get similar or even better results.
Even if it’s just an 11% return, investing £500 a month for 30 years would generate a portfolio worth £1.4 million. And following the 4% withdrawal rule, that’s enough to generate an annual passive income of £56,000 – not bad.
However, it is important to remember that investing in UK stocks is far from risk free. There is never a guarantee of positive returns, especially when picking individual stocks. In fact, a poorly constructed portfolio could end up decimating your retirement savings.
That is the main advantage of savings accounts. Unless the bank fails, retirement savings are safe. And even then, up to £85,000 is protected by the FSCS. However, given the potential rewards, investing in the stock market is a risk worth taking, in my opinion.
