The 2022 stock market correction may have just presented UK investors with a rare opportunity to propel their stocks and ISA shares to new heights.
Although he doesn’t feel like it now, the indiscriminate crash in stock prices this year has created countless buying opportunities. And for patient investors, capitalizing on this rare scenario could lead to an impressive £1m long-term portfolio.
Building a Rewarding ISA
Looking back throughout history, there have been many periods of stock market volatility. And with each instance of a crash or correction, investor sentiment plummeted to record lows. It is therefore not surprising that this pattern repeats itself in 2022, with most wallets appearing to be sold in a panic.
Yet what many investors seem to forget is just how resilient the stock market is. Fun fact, he has a perfect track record of always recovering before hitting new records. And immense wealth can be unlocked for those who see falling valuations as an opportunity.
Under average market conditions, the FTSE100 has historically provided an annual return of around 8%. Assuming an investor could max out their stocks and shares ISA each year and replicate that level of return via a low-cost index fund, it would take around 20 years to earn £1m, starting from scratch.
Yet buying blue chip UK stocks today when stock prices are very cheap could significantly reduce that waiting time. In addition to providing a greater margin of safety, depressed valuations allow investors to capitalize on the momentum of the eventual stock market recovery. And even if a portfolio’s return is only boosted to 10%, that’s enough to erase six years of waiting!
Nothing is without risk
As exciting as becoming a millionaire over the next two decades, there are a few caveats to consider.
While a stock market rally will almost certainly occur, there is a giant question mark as to when. The recovery may have already begun. Or we might actually only be halfway through the chaos. Unfortunately, it is impossible to know for sure.
In other words, an investor looking to take advantage of stock market volatility today can either experience huge success in the months ahead or see their portfolio continue to fall. And if it’s the latter, reaching millionaire status with a Stocks and Shares ISA could take considerably more than 20 years.
Fortunately, investors can use a simple buying strategy to mitigate this risk. This is called the average cost in pounds.
Instead of investing all their capital in a giant lump sum, individuals can trickle money into high-quality companies or index funds over time. This way they can capitalize on cheap valuations before prices start to rise. But if prices continue to fall, they still have capital on hand to buy more shares at even better discounts.
Post-2022 stock market correction: A once-in-a-lifetime chance to create a £1million stock and share ISA? first appeared on The Motley Fool UK.
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Motley Fool United Kingdom 2022