A lot of investors hear the words ‘stock market crash’ and are paralysed by fear. Not me. I see a crash as an excellent opportunity for me to build long-term wealth by scooping up bargain-priced shares in brilliant businesses.
Here is how I would get ready to do that right now, with £20,000.
Getting ready to invest
Although there will be a crash at some point, nobody knows when. It could be next week, or it could be decades away.
That means I am getting ready for the next stock market crash today, even though I do not know when it will be. Partly that involves me contributing to my Stocks and Shares ISA before the current annual contribution deadline, which falls next week.
But it also means developing a plan of action for what I will do when the crash does come. It makes sense to do that now, with time on my side. A crash can be chaotic and bargain prices may not hang around for long. So I want to be ready to act immediately.
Blue-chip shares on sale
A stock market crash can present me with a good opportunity because a lot of share prices tend to fall dramatically within a fairly short period.
Sometimes such falls are justified, as a crash is triggered by an event that will affect the prospects of the businesses concerned. But often in a crash, excellent companies whose prospects are unchanged see their share prices marked down sharply as part of a general selloff.
Consider M&G as an example. At the moment, it has a dividend yield of 10.3%. That is already very attractive to me and indeed I own the shares in my portfolio. But during the stock market crash in March 2020, they were trading at around £1.10 each. Interestingly, that was not a one-off event. I could have bought at that price in March 2020, but also in April and May that year. If I had done so, those shares would now be yielding 17.8%.
Those are the same M&G shares I could buy now.
It is simply that if I had jumped on the opportunity to purchase them more cheaply in the 2020 stock market crash, I would now be earning a significantly bigger yield. Over the course of time, that could help me build wealth.
If I put £20,000 into shares yielding 17.8%, I would nearly triple my money in 11 years. That is without even compounding the dividends, which could help me build my wealth faster.
My game plan
Whether I could get such a high yield on average overall remains to be seen.
After all, I always diversify across a range of shares and so even if I had had £20,000 to invest in spring 2020, I would not have put it all into M&G.
But the principle is clear. A stock market crash can throw up some real bargains. By that I do not simply mean shares that look cheaper than before. I mean shares in outstanding companies on sale for well below what I see as their long-term value.
By getting my ducks in a row now and identifying a shortlist of shares to buy at the right price, I hope to use the next crash to my advantage.
