Although the recent market weakness has been very disappointing, every cloud has a silver lining.
The silver lining on this occasion is that there are now plenty of cheap ASX shares for investors to choose from on the Australian share market.
In light of this, if I had $20,000 sitting on the sidelines, I would seriously consider putting it into the share market. After all, doing this today could potentially help me retire early in the future.
Buying cheap ASX shares today
While market selloffs may evoke fear in most investors, they present an opportune moment for smart investors to acquire cheap ASX shares, a move that can significantly fast-track the journey to early retirement.
During market downturns, numerous quality ASX shares often trade at substantial discounts, offering immense value to long-term investors. CSL Limited (ASX: CSL), Macquarie Group Ltd (ASX: MQG), and ResMed Inc (ASX: RMD) are three such examples that have fallen heavily and recently touched 52-week lows.
These discounted stocks have solid fundamentals, robust earnings potential, and promising growth prospects, which, when coupled with a patient investment horizon, can yield significant returns over the long term.
The power of compounding
Another reason to buy cheap ASX shares following a market selloff is the power of compounding.
It can amplify the gains from these discounted stocks over time. As the market recovers and these undervalued shares appreciate, the returns generated contribute substantially to an investor's retirement portfolio.
For example, a single $20,000 investment earning a 10% return over a 10-year period would turn into a touch under $52,000. But if you can squeeze out an extra 1% per annum by buying cheap ASX shares, then you would end up with almost $57,000. That's an extra $5,000 thanks to market volatility.
Do the same for 20 years and a 10% average return turns into almost $135,000 and 11% is over $161,000. That extra 1% can be pretty powerful!
But it is important to remember that not all cheap-looking ASX shares are actually good value. It's important to undertake thorough research, focusing on the underlying fundamentals and future prospects of the companies.
