A stock market crash doesn’t exactly sound like an exciting prospect, and it understandably triggers a lot of nerves. However, as horrible as these volatile periods are to experience, they’re actually a rare opportunity to position a portfolio for long-term success.
They can even pave the way for an earlier retirement. Here’s how.
Building a retirement portfolio
In my opinion, an investment portfolio of premium stocks is one of the best retirement nest eggs an individual can build. And doing it within a tax-efficient account like an ISA or SIPP only amplifies the benefits.
The goal is simple. Invest in high-quality companies and profit from any share price appreciation and dividends along the way. Provided that the underlying businesses thrive, even a modest sum of capital can transform into a potentially giant pile of money.
Of course, investing in the stock market has risks. Stocks don’t always go up, and dividends can be cut. Sometimes, this is down to temporary problems, or a spike in market pessimism. Other times, it’s because a catastrophic failure has occurred, and a once-thriving enterprise is brought to its knees.
The latter can sometimes be difficult to detect before it’s too late, even with a rigorous analysis. Fortunately, the impact of such failures can be mitigated through diversification. By simply ensuring a portfolio contains a variety of top-notch enterprises from different industries, large downturns in single positions have less of a chance of derailing an investor’s progress.
But what about during a stock market crash when everything is seemingly in freefall?
Crash opportunity
When the stock market decides to throw a tantrum, many investors also start throwing their toys out of the pram. In an effort to protect against downside losses, terrific stocks end up getting sold off for no apparent reason beyond general fear. This volatility is pretty difficult to avoid. And even a well-diversified portfolio can take a massive hit in the process.
But as unpleasant as this situation is, it actually presents an opportunity to do some shopping. After all, providing the sold-off companies haven’t become fundamentally compromised, investors now have the chance to start snatching up bargains.
Despite popular belief, crashes are actually pretty rare events. In fact, there have only been five major downturns in the last 40 years. That’s an average of once every eight years. And waiting around for the next crash to occur could end up leaving a lot of money on the table.
As every investor knows, the ultimate strategy for building wealth in the stock market is to buy low and sell high. And while buying opportunities are always present, it becomes exceptionally easy to find them during periods of heightened volatility.
Even if capitalising on a crash yields just an extra 1% in average portfolio returns, that’s enough to accelerate the wealth-building process by years in the long run.
