As a 20-something, I could argue retirement is one of the last things on my mind. However, as a Fool, I know the power of investing for the long run.
Therefore, with plenty of talk surrounding a stock market crash, I’d be keen to use it as an opportunity to buy quality stocks for a cheap price. With my profits, and through other strategies, I’d hope to try and retire early.
Here’s how I’d go out about it.
A dire few years
Frankly, rumblings of a stock market crash don’t surprise me. The last few years have tested retail investors. And events such as the pandemic, the war in Ukraine, and the inflationary pressures that followed have taken their toll. As a result, we’ve seen global markets go through a significant lull in the last few years. On top of that, other issues such as the significant US debt pile are further cause for concern.
Despite this, as they say, every cloud has a silver lining. And I think it certainly rings true for any potential crash. Here’s how I’d capitalise on one.
Firstly, I’d remember my aim, which is investing for the decades ahead. Volatility is inevitable. History has shown that markets will go through periods of decline. However, when viewing investments over a longer period, I’m able to ignore short-term peaks and troughs.
Take the S&P 500 as an example. 2022 saw the Index decline 18%. In 2008, it fell by over 30%. However, since 2000, it’s returned around 9% on average every year. This shows that by ignoring short-term volatility, I can use time as a tool to maximise my gains.
This leads to the next thing I’d consider. And that’s to buy quality stocks for cut-down prices that would offer me growth potential. As Warren Buffett said: “Be greedy when others are fearful”. A stock market crash is the perfect time to do this.
In a crisis, I’d seek to buy solid companies with reliable earnings and steadily rising profits.
Finally, I’d also target stocks with high dividend yields that could generate passive income. After all, cheaper share prices mean higher yields. And the income would tide me over should share prices experience periods of decline.
For this, I’d turn my attention to the FTSE 100. The index is jam-packed with blue-chip companies offering yields of over 4%. For me, this is ideal. A personal favourite of mine is Lloyds, which provides a yield of 5.8% covered three times by earnings.
Of course, it’s worth noting here that dividends aren’t guaranteed, and they can be reduced or cut altogether at any moment by a business.
Seeing the value of my investments falling isn’t easy. I have no doubt there will be times when I consider cashing in. However, by leveraging the points above, I know in the long run there’s a good chance I’ll see some healthy returns. With passive income on the side to boost my returns, this will further aid my cause. Should the market crash, I’ll be ready.