Stock market correction: a once-in-a-decade opportunity to get rich?
As unpleasant as the 2022 stock market correction has been for many growth investors, it’s actually created some rare buying opportunities. After all, the last time a significant drop like this emerged in the market was over a decade ago, excluding the two-month crash and recovery of the Covid-19 pandemic in 2020.
UK shares are already on the mend, with the FTSE 100 recently hitting a new all-time high. However, there remain plenty of strong businesses trading at depressed valuations. And patient investors with a keen eye for quality can capitalise on these bargains to propel their portfolios in the long run.
Where to find bargains?
The FTSE 100 index is a popular destination for many UK investors. And that’s not surprising given it contains the largest 100 enterprises on the London Stock Exchange with a reputation for being more stable. Yet, it’s the FTSE 250 where I think most bargains are likely to be found.
This index is home to established but smaller businesses more susceptible to economic fluctuations. That’s most likely why the FTSE 250 suffered a nose dive in last year’s stock market correction compared to the flat performance of its larger counterpart.
Of course, focusing on this region of the stock market is inherently riskier. Why? Because there’s a higher probability of investors panic selling their positions at the first sign of trouble.
However, that’s also why it’s more likely to contain incredible bargains. And for investors with a stomach for short-term volatility, the FTSE 250 may contain some of the best investment opportunities in the UK financial markets today.
Investing during a correction
While shares have seemingly stopped free-falling, the stock market correction may not be over just yet. Don’t forget uncertainty continues to ravage the UK economy.
With inflation still elevated and more interest rate hikes on the horizon, many businesses have already seen their revenue and cash flow come under pressure. And that could be a catalyst for another steep downturn in stock valuations.
However, for companies with robust balance sheets and low levels of debt, this may not be all that concerning. While it’s undoubtedly frustrating, firms capable of surviving the storm may find themselves in the unique position of a reduced competitive landscape once the dust settles. And that creates rare opportunities for firms to take market share quite rapidly.
Investing during a stock market correction can be a volatile experience. And even discounted shares can still fall further for seemingly no reason. That’s why ensuring an investment portfolio is diversified, using pound cost averaging, and employing a Warren Buffett-style margin of safety is paramount.
These simple yet effective strategies can help offset the short-term risks as well as enable investors to capitalise on further share price downturns leading to superior long-term gains.
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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