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Thanks to the ongoing stock market correction, many cheap stocks are available to buy today.
As inflation and interest rates rise, the volatility of stocks introduces new risks that investors must contend with. However, in the long run, the performance of low-cost businesses can be impressive for patient individuals.
And with the right buying strategy, it is possible to partially reduce the risk of investing during volatility.
Buying during a stock market correction
It seems like every week a new record is broken due to the poor performance of the stock market. But underneath all this chaos, inflation is actually starting to reverse. August UK inflation fell for the first time since the start of this recession.
If we assume this trend will continue, we are nearing the end of a downward stock market correction, even if stock prices are not yet reflected. In other words, the window of opportunity to snap up cheap UK stocks may be closing.
Investing in a business when prices seem free is an incredibly scary prospect. But as every other correction or crash has shown in the past, fortunes are made in bear markets. Fortunately, there is a relatively simple buying strategy called pound-cost-averaging that can help reduce the risk of free-falling share prices.
Instead of trying to time the very impossible fix bottom, I’d split my spare captain into smaller pieces. Then, every week, or month, I put my money into businesses that I believe are undervalued.
What effect does this have? With the high volatility roiling the markets, even in the best businesses, the likelihood of a major price drop is high. I can invest in stocks that look cheap today only to watch them get even cheaper next week.
Splitting Captain into smaller shares allowed me to buy more shares at lower prices in what I believed to be excellent business deals. This lowers the average value of my portfolio position, allowing for higher returns if the stock price eventually recovers and returns.
Everything will not recover in a long time
From an overall perspective, the stock market has a 100% success rate in recovering from even the worst financial disasters. But when it comes to individual stocks, that’s when things get murky.
As a long-term investor, the current economic climate is a short-term problem. And depending on the current consensus, it can be resolved in the next two years. But that doesn’t mean it doesn’t have a real impact on businesses today.
High living costs have caused consumer spending to fall off a cliff, making it difficult for most industries to grow. Meanwhile, higher interest rates raise the cost of servicing debt obligations, which puts more pressure on organized companies. And as more companies take on debt to survive the pandemic in 2020, the rate of losses is rising.
So, there are undoubtedly many cheap stocks today that are going down for good reason. That’s why it’s so important to understand the financials of the underlying business before making any investment decisions.
Let’s say cash flow is disrupted or margins are rapidly declining. If so, there’s a higher chance I’m looking at a value trap than a buying opportunity.