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The decline in stock markets has likely put some early retirement plans in jeopardy. However, I still believe that buying stocks is the best way to get back to my own retirement planning.
Hard times
It’s not hard to come up with a list of why things are tough right now. We have persistent inflation and high interest rates, we have conflicts in Eastern Europe and the Middle East.
To make matters worse, no one knows for sure when these difficult times will end. Not the Bank of England, not the well-paid fund managers who work in the City, certainly not me.
On a more positive note, this means that an increasing number of UK shares are starting to look like bargains. That’s great if I have some extra money to put to work, even better if I’m just starting my investing journey.
That said, there are still dangers we need to be aware of.
It pays to be demanding
Buying any old stock that has fallen in value is a recipe for disaster if I ever hear of one.
The sad reality is that there will be some “cheap” investments that will not recover from the 2023 defeat. This may be due to earnings already peaking, high debt levels and/or concerns about financing to keep the lights on. lit (raising money in a falling market can be very difficult). These are the value traps Which I’m desperate to avoid.
I’m also not accumulating stocks just because they have astonishingly high dividend yields. When the income stream seems too good to be true, it usually ends up being cut. Anything higher than, say, 5% should mean additional research.
So what is my strategy? Actually, it is quite simple. I’m doing what Warren Buffett, arguably the best investor on the planet, has always done. I’m looking for “Quality merchandise when it’s on sale.“.
Let’s use an example that I currently have on my radar.
I trust in quality
Premium alcoholic beverage seller DiageoThe (LSE:DGE) share price has recently fallen to its lowest value in a whole year. To me, this seems like a wonderful opportunity to buy a company that:
- It has an excellent portfolio of brands that people buy out of habit.
- Sells products worldwide (so profits are diversified geographically)
- It generates very high margins relative to other large UK companies.
- Returns cash to investors in the form of dividends (and tends to increase this amount each year)
What’s even better is that Diageo shares are currently trading at a valuation well below their five-year average.
Reduce risk
To be clear, this is not to say that an investment here (or in any other stock) is risk-free. Earnings in all companies are cyclical to some extent. A cost of living crisis can push people to reduce their alcohol consumption or try cheaper alternatives.
For this reason, I will still try to split my money if I buy Diageo (I haven’t decided on either one yet). In other words, I would look to invest in other quality companies that are not involved in the beverage sector but that I would feel equally comfortable holding long after sentiment recovers.
As mentioned above, no one knows when that might happen. But I’d be willing to bet my retirement fund that the markets won’t stay this low forever.
