Buying dirt-cheap FTSE shares with the intention of holding them for decades strikes me as a great way to build wealth for the future. Investment trends go in cycles, and I would much rather buy at the bottom of the market than at the top.
A major challenge that every investor faces is that nobody knows where share prices are going to go next, especially in the short term. I could easily load up on what I think are dirt-cheap FTSE shares today, only to find they are even cheaper in a year’s time. I will have lost money along the way.
I’m buying dirt-cheap FTSE shares today
That is why I am investing with a long-term perspective. History shows that over the longer run, stock markets beat almost every other investment. Clearly, they should do even better if I buy them when they are cheap, rather than expensive.
My aim is to turn the market cycle to my advantage, by purchasing undervalued shares in troubled times, and holding on for the recovery. These are certainly troubled times, but that is throwing up plenty of dirt-cheap FTSE shares.
Of course, I could be wrong. As the oil price rockets towards $150 a barrel, we could be heading for a serious recession. It could drag on for years. This is where the second part of my strategy comes in. I’m planning to hold my dirt-cheap FTSE shares for a very long time.
Ideally, I’m looking to hold them for at least three decades, because I plan to keep my portfolio invested after I retire, and draw a rising passive income from it. I’m hoping that over such a lengthy timespan, my strategy will prove profitable.
Dirt-cheap FTSE shares are not automatically bargains. Often, there is a very good reason they are going cheap. Sales may be falling. Margins rising. Competition may be too tough. Smaller, nimble rivals may be snatching market share. Management strategy may be all over the place. Its customers may simply have moved on.
Holding for the long term is key
I will check for all these dangers, before buying FTSE shares that look dirt-cheap. I would favour companies that have suffered temporary setbacks, and look ripe for recovery. In some cases, the setback may have been out of their hands (the pandemic is a good example). In others, the market may have overreacted to a single set of poor results. In this case, their valuations may not reflect their future prospects.
The big danger of course is that the company does not recover. That is why I would build a balanced portfolio of at least a dozen stocks, to spread my risk. There should be plenty of dirt-cheap FTSE shares to choose from, as global stock market volatility intensifies.
I won’t go shopping for shares all at once. Instead, I will spread out my purchases, taking advantage of market dips, to get them at really low prices. Then I will sit back and wait for them to (hopefully) recover, while investing all my dividends to buy more stock. Over time, I believe this is a winning strategy for my retirement.
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Harvey Jones doesn’t hold any of the shares mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. 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.