Slumping stock markets have likely put a fair few plans for early retirement in jeopardy. However, I still regard buying shares as the best way of getting my own retirement planning back on track.
Tough times
It’s not hard to come up with a list of why things are tough right now. We’ve got sticky inflation and high interest rates, we’ve got conflict in Eastern Europe and the Middle East.
To make matters worse, no one knows for sure when the tricky times will end. Not the Bank of England, the highly-paid fund managers working in the City, and certainly not me.
On a brighter note, this means an increasing number of UK stocks are starting to look like bargains. That’s great if I have some spare cash to put to work, even better were I just starting my investment journey.
That said, there are still dangers to be aware of.
It pays to be picky
Buying any old stock that’s fallen in value is a recipe for disaster if I ever heard one.
The sad fact is that there will be some ‘cheap’ investments out there that won’t recover from 2023’s rout. This may be due to earnings already peaking, high levels of debt and/or concerns over funding to keep the lights on (raising money in a falling market can be very hard). These are the value traps that I’m desperate to avoid.
I’m also not piling into stocks only because they boast staggeringly high dividend yields. When the income stream looks too good to be true, it usually ends up being cut. Anything over, say, 5% should mean extra research.
So, what’s my strategy? It’s actually pretty simple. I’m doing what Warren Buffett, arguably the best investor on the planet always has done. I’m looking for “quality merchandise when it is marked down“.
Let’s use an example currently on my radar.
In quality I trust
Premium alcoholic drinks seller Diageo‘s (LSE: DGE) share price has recently fallen to its lowest value in a whole year. To me, this looks like a wonderful opportunity to buy into a company that:
Has a bumper portfolio of brands that people buy through habit
Sells products all around the world (so, earnings are geographically diversified)
Generates very high margins relative to other big UK companies
Returns cash to investors by way of dividends (and tends to increase this amount every year)
What’s even better is that Diageo’s shares currently trade at a valuation that’s a good bit lower than its average over the last five years!
Reducing risk
To be clear, this isn’t to say that an investment here (or in any other stock) is free of risk. Earnings in all businesses are cyclical to some extent. A cost-of-living crisis can push people to reduce their drinking or try cheaper alternatives.
For this reason, I’ll still make a point of spreading my money around if I snap up Diageo (I haven’t decided either way yet). In other words, I’d be looking to invest in other quality companies that aren’t involved in the drinks sector but which I would be equally comfortable holding long after sentiment recovers.
As mentioned earlier, no one knows when that might happen. But I’d be willing to bet my retirement pot that markets won’t stay this low forever.
The post Stock markets are struggling but I’m buying beaten-down shares to retire early appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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More reading
2 sinking FTSE 100 dividend shares! Are they brilliant bargains or terrible traps?
Is Diageo stock the ultimate recession-proof investment to buy now?
2 stocks I’m expecting to buy this week
£5k in an ISA? Here are 3 top FTSE 100 stocks I’d snap up today
UK stocks near 52-week lows: 2 I’d buy and one I’d avoid
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. 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.
