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.
