Investors often seek deep, long-lasting value from picking up cheap shares during a stock market crash. But if that was me today, I’d wager I’d be waiting a heck of a long time.
The reason being — a stock market crash has already happened!
Let me outline exactly why this is important right now.
After the C-word
The pandemic created a mass panic in world stock markets.
On 17 January 2020, the FTSE 100 sat at 7,674. Eight weeks later, the index of the UK’s top 100 companies had plummeted by 30%.
It was the worst crash since 1987.
I wrote at the time: “I think I checked my Stocks and Shares ISA app 30 times [a day]. While the circuit breakers were firing off on the S&P 500 the same was happening in my brain. I couldn’t believe it. All those gains, wasted. Disappeared in a puff of smoke.”
But here I am, out the other side and my portfolio of stocks and shares is performing pretty well.
What happened is that I was able to buy good FTSE 100 companies on the cheap. I examined my investment checklist. I kept a little cash on the side to take advantage. And I stuck to the plan.
Poking the bear
Markets move in cycles. From the optimism of bull markets to the pessimism of bear markets and back again. This is the nature of the beast. That’s also the case when we consider economic growth. For example, look at the International Monetary Fund’s twice-yearly global outlook.
It said in October 2023 that global growth would slow from 3.5% in 2022 to 2.9% in 2024. So is that a cue to pull out of my investments? Time sell up and just have cash? I think that would be a big mistake.
If I did that, I’d be missing out on growing positions in quality dividend shares.
I’ve found that owning good companies in which my position compounds for a long time through reinvested dividends is the simplest way to build my wealth. It’s easy for me to get distracted and lose sight of this fact. Warren Buffett noted this point a few years back.
“What you are looking for is a way to get one good idea a year,” he said. “That is very hard to do. Especially in an environment where people are shouting prices back and forth every five minutes and shoving reports in front of your nose.”
How to aim for profit
2022 was also an extraordinarily tough year for investor portfolios. Between January and June, the S&P 500 dropped 20.6%. That is the US index’s worst outcome since 1970!
Michael Green, the highly-regarded portfolio manager for Simplify Asset Management, said as much this week.
Speaking on the Eurodollar University podcast, he laid out the picture: “In November 2023 we are now over 500 days since the Russell 2000 [the US index of small companies] last made a 52-week high.”
By Green’s metrics, one of the worst bear markets in history already happened!
My conclusion? Waiting for a stock market crash to buy cheap shares just means sitting in cash and waiting for big downturn that may never come. Instead, I’ll try to drip feed my buys in both bull and bear markets to build my long-term wealth.
