Since the stock market correction kicked off in 2022, UK shares have regained significant ground. Since October, the FTSE 100 has moved from 6,908 points to around 7,600 today, even reaching a new all-time high in the process. And yet, many of its constituents haven’t made a full recovery.
As a result, the UK’s flagship index continues to house some excellent top-notch stocks at discounted prices. And tremendous wealth can be unlocked for prudent investors capable of spotting the winners among the duds.
Even for those who can only comfortably allocate £500 each month, that’s still more than enough to pave the way for a more luxurious retirement.
Buying UK shares during uncertainty
Despite the recent upward trajectory of the stock market, uncertainty remains elevated. The macroeconomic environment is still filled with question marks. And while a recession is seemingly less likely today, that doesn’t mean the cost-of-living crisis hasn’t taken its toll.
Growth will likely be challenging moving forwards. And investor expectations of an upcoming economic boom might leave many disappointed should it fail to materialise.
In other words, further volatility could be yet to come. Therefore, when capitalising on seemingly-cheap UK shares, it’s probably wise to deploy a pound-cost-averaging strategy.
Instead of investing giant lump sums in one go, investors can spread their purchases over several weeks and months. Why? Suppose the price of an existing position within a portfolio starts to tumble despite the underlying business making headway? In that case, investors can top up their investments and decrease the average price paid per share.
Providing a thesis is correct, in the long run, pound-cost-averaging would drastically improve the returns versus lump sum investing.
Building a big ISA
In the UK, the average level of private pension savings stands at around £190,000. Paired with the State Pension and financial responsibility, this can provide a relatively decent lifestyle. However, for those with an appetite for luxurious holidays and exotic excursions, chances are an individual is going to need considerably more.
Fortunately, capitalising on bargain buying opportunities while managing the risks of investing in UK shares can help achieve such goals.
Even if an investor only manages to match the FTSE 100’s average 8% historical return, investing £500 a month can replicate a £190,000 pension pot in 16 years when starting from scratch. And by waiting another 16 years, that pension pot can potentially grow to just shy of £900,000.
Assuming only 4% of this capital is withdrawn each year, that’s the equivalent of a £36,000 annual salary to fund a more stylish retirement. And by investing through an ISA, it’s tax-free.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Obviously, there’s no guarantee of achieving an 8% annualised return. Even by investing in an index fund, the FTSE 100 may not continue to deliver its historical gains moving forward. And a poorly timed crash or correction, like the one seen in 2022, can leave investors with considerably less than expected.
However, given the potential rewards and prospect for market-beating returns by hand-picking undervalued UK shares, this risk is well worth taking, in my opinion.
