Don’t wait for risks to subside to buy shares – that time will never come

Today’s Budget and the upcoming US election should not dissuade investors

Some stock market investors will have avoided buying shares ahead of today’s Budget. After all, it could have far-reaching consequences for the performance of companies that are reliant on the UK economy.
However, even after the Budget has passed, investors will still be unable to breathe a sigh of relief. The US election is now imminent, with its outcome potentially having major repercussions for the global economy’s growth outlook.
In addition, conflicts in Ukraine and the Middle East are showing little sign of abating. Any further escalation could negatively impact the world economy’s prospects, thereby putting downward pressure on share prices.
In Questor’s view, such geopolitical and economic risks are omnipresent. Investors who wait for a period of complete calm before buying shares are therefore likely to end up accepting paltry returns from cash over the long run. Even if the threat from known unknowns appears to be low, unforeseen challenges such as the pandemic can prompt severe stock market turbulence. 
Rather than waiting for the perfect moment to buy shares, investors should instead view the existence of risk as an opportunity to buy high-quality companies at discounted prices. 
By obtaining a margin of safety when purchasing shares, which means buying a stock for less than it is worth, investors can moderate their potential losses. After all, cheaper stocks are likely to decline to a far lesser extent than expensive stocks in a market downturn.
Buying companies for less than their intrinsic value also provides greater scope for long-term capital gains. Although the stock market always has and will experience temporary periods of intense volatility, ultimately it has always gone on to produce new record highs over the long run. Investors who stick with a diverse range of holdings are therefore extremely likely to enjoy far higher gains than those available from other mainstream assets.
Indeed, even after their lacklustre performance in recent years, UK shares still have an excellent long-term track record. Both the FTSE 100 and FTSE 250 indices, for example, have produced high single-digit annualised total returns since inception.
The FTSE 250 index provides, in this column’s view, particular scope for stunning long-term returns. The mid-cap index’s UK bias means that it has been derided by investors to perhaps an even greater extent than the large-cap index of late, which is no mean feat. Over the past five years, it has produced an annualised return of just 1pc. This means that many of its members currently offer wide margins of safety.
With the UK economy’s performance having dramatically improved, as evidenced by its return to positive growth in the first two quarters of the year and the emergence of a modest inflation rate, the prospects for UK-focused stocks in the FTSE 250 index are extremely bright. 
Their outlook is likely to further improve as a brisk pace of monetary policy easing is implemented. Interest rate cuts should not only boost the financial performance of companies as the economy’s prospects ultimately strengthen, but also prompt improved market sentiment as many investors are typically more inclined to buy shares that have risen in price. 
Separately, a large number of UK stocks are in rude financial health. Even if today’s Budget is poorly received by investors and various other geopolitical and economic risks cause elevated stock market volatility in the near term, this does not mean the risk of permanent capital loss from holding UK-listed shares is any higher. 
Wild share price swings are caused by the fleeting views of a sometimes fearful, often greedy, investment herd. The financial strength of companies, rather than the volatility of share prices, therefore provides a far more accurate gauge of the risk of permanent capital loss. 
Ultimately, all stock market investors must accept that the prices of their holdings will fluctuate – sometimes dramatically so. But even having experienced a plethora of economic disasters and geopolitical catastrophes over recent decades, a diverse portfolio of shares has still beaten every other mainstream asset class. 
Investors should, therefore, continue to back the UK stock market even as geopolitical and economic risks remain elevated. Over the long run, Questor firmly believes that they will be handsomely rewarded.
Read the latest Questor column on telegraph.co.uk every weekday at 5am. Read Questor’s rules of investment before you follow our tips
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