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For many, the stock market rally still seems out of reach as the latest inflation data continues to push stocks into the red. Yet, despite this latest wave of volatility, the FTSE250 is still well above its July low.
The slowdown observed earlier this week can be explained by disappointing inflation results. But it’s worth pointing out that inflation is, in fact, falling. It now stands at 8.3% in the United States, down from its peak of 9.1% in June. Meanwhile, here in the UK, inflation sits at 9.9%, down from its peak of 10.1% in July.
In other words, the stock market rally may have already begun. If that’s true, then the time to buy the best UK stocks at unbelievable prices could be running out. So the question is, how can I find these buying opportunities before it’s too late?
Finding the Best Investments for the Coming Stock Market Rally
Some of the best buying opportunities in today’s market are arguably some of the hardest hit stocks since the correction began in late 2021. Not all of these companies will weather the storm, however.
As a long-term investor, fluctuations in inflation don’t bother me that much. But for companies with constrained cash flow and fragile balance sheets, the subsequent rise in interest rates creates a significant problem. As debt becomes more expensive, the profit margins of indebted companies are already tightening.
Although I am convinced that the majority will find a way to survive, some will undoubtedly knock on the door of insolvency. Anyway, let’s say I’m buying stock in a company that’s struggling to stay afloat rather than focusing on long-term growth. In this case, I doubt that my returns will be spectacular.
That’s why I look for UK equities with strong fundamentals, multiple competitive advantages and viable growth strategies to take advantage of any stock market rally. Luckily, I’m spoiled for choice, with most investors busy selling in a panic.
Buying cheap, high-quality UK stocks always comes with risks
While the stock market rally may have already begun, there are no guarantees. Either way, volatility will stay with us for some time, especially if central banks fail to perform a “soft landing”. After all, even if inflation falls, a recession will create its own, more difficult set of problems.
So how can I maximize my potential long-term returns while simultaneously protecting my portfolio from further declines? This is where averaging the cost in pounds comes into play.
Having identified which UK stocks I believe are best positioned to take advantage of the market rally, it’s time to start adding these companies to my portfolio. But instead of investing all my capital at once, I will spread my buying activity over several months.
By doing so, if their stock prices continue to fall, I have the opportunity to acquire additional shares at a better price, which lowers my average cost. Of course, it is crucial to monitor why every business is collapsing. If a new revelation shows that the group is no longer fundamentally sound, buying more shares could be a recipe for disaster.