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Don’t ‘save’ for retirement! I’d invest in dirt-cheap UK shares instead

A young woman sitting on a couch looking at a book in a quiet library space.
Image source: Getty Images

After the stock market threw quite an impressive tantrum in 2022, dirt-cheap UK shares seem to be everywhere, especially in the FTSE 250.

A common piece of sound financial advice is to always save some money for retirement. But with interest rates being so low for over a decade, savings accounts haven’t exactly provided spectacular returns. In fact, even after the recent round of interest rate hikes, the average interest rate offered by UK savings accounts still stands at a measly 0.85%.

Of course, compared to the FTSE 250’s 20% decline last year, that’s quite desirable. And perfectly demonstrates the power of keeping money in the bank versus the stock market during economic turmoil.

However, when zooming out to multi-decade periods, keeping all money in the bank may not be a sensible idea. Why? Because even with the 2022 stock market correction, the 2020 ‘Covid-Crash’, the 2008 financial crisis, and the 2000 dotcom bubble, the FTSE 250 index has still delivered an average 10.6% return since its inception in 1992.

Over long time horizons, investing intelligently in UK shares is a proven method for building substantial wealth. And, historically, the stock market has delivered its best performance right after a crash or correction. In other words, investors today have a rare opportunity to capitalise on some fantastic buying opportunities.

What are the best UK shares to buy today?

But not every beaten-down business is a bargain. In fact, plenty of companies have been sold off for good reasons. Therefore, investors simply buying the cheapest shares they can find will likely destroy wealth rather than create it.

Instead, the focus must be placed on finding high-quality enterprises merely suffering from short-term disruptions. If a balance sheet is riddled with debt, and there’s insufficient capital to meet short-term liabilities, it’s probably a good idea to run in the opposite direction. Similarly, a collapsing share price may be entirely justified if the business model has become compromised and cash flows disrupted.

On the other hand, if the financial health of a business is intact and growth is simply slowing as a result of economic headwinds, then it may merit further investigation.

Eliminating weak overleveraged businesses is obviously only the first step in a critical line of investigation. However, this filter can quickly remove UK shares likely to be poor investments from consideration.

Building a retirement fund

As previously mentioned, the FTSE 250 has historically delivered average annual returns of 10.6%. And by capitalising on the depressed valuations today, investors could lock in similar or even better results.

Even if it’s just an 11% gain, investing £500 monthly over 30 years would yield a portfolio worth £1.4m. And following the 4% withdrawal rule, that’s enough to generate a £56,000 annual passive income – not bad at all.

However, it’s important to remember that investing in UK shares is far from risk-free. There’s never a guarantee of positive returns, especially when picking individual stocks. In fact, a poorly constructed portfolio could end up decimating retirement savings.

That’s the main advantage of savings accounts. Unless the bank goes under, retirement savings are safe. And even then, up to £85,000 is protected by the FSCS. Nevertheless, given the potential rewards, investing in the stock market is a risk worth taking, in my opinion.

The post Don’t ‘save’ for retirement! I’d invest in dirt-cheap UK shares instead appeared first on The Motley Fool UK.

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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.

Motley Fool UK 2023