Who’s afraid of a stock market crash? I used to be, when I first started investing in shares and funds. Not so much now.
I’m sure I’m not alone. Most novice investors assume a stock market crash must be a bad thing. It sounds logical. Who wants to see the value of their portfolio – or any other asset – drop by up to a third in a matter of days or weeks? That’s going to hurt. So why am I so calm about the prospect?
I started investing seriously at the end of the technology boom of the late 1990s, and got my fingers badly burnt. I pumped what was for me a big sum into the all-conquering Aberdeen Technology fund. Then I threw another chunk at Aberdeen European Technology, thinking that counted as diversification. Within a month, both had crashed and never recovered.
I’ve learned from my tech fund disaster
I have seen plenty of stock market crashes since then, and got through them pretty well. How come? First, my portfolio is now widely diversified. Instead of being top-heavy with tech stocks, I’m spread across a range of global markets, sectors and indices, with a bias to UK shares.
While my portfolio is 85% in shares, I also have some exposure to bonds, crypto and gold. That helps limit my losses in the heat of a stock market crash, so it doesn’t hurt quite so much.
Another thing I do is keep my eyes focused on the long term. I plan to remain invested in shares for life, taking money as required through drawdown. More and more investors do that now. When I started out, most people expected to switch into lower-risk bonds in their late 50s and early 60s, in preparation for buying an annuity at 65. Not any more.
I’ll turn the next stock market crash to my advantage
Investing for the long term means I don’t have to worry about a short-term stock market crash. I will just wait for markets to recover, as they have always done in the past. When I approach retirement, I will build up a pot of cash, so I don’t deplete my portfolio by drawing money in the middle of a crash.
There’s another reason why I actively look forward to a stock market crash. I treat this as an opportunity to go shopping for shares at the new reduced price. It’s a trick I learned from writing for The Motley Fool. When markets crash, we urge users to go bargain-hunting. We think it’s an unmissable opportunity to pick up top stocks, when they’re going cheap. Or even to load up on an index tracker.
Gains aren’t guaranteed, of course, and not all shares recover evenly, which is why diversification is important. But history shows that in the long run, stock markets rise, plus I get dividends as well. So I see a crash as an opportunity, not a threat. I plan to take advantage, next time one comes along.
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Harvey Jones has no position in any of the shares mentioned. 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.