Would a stock market crash matter?

Christopher Ruane explains why a stock market crash could turn out to be positive, not negative, for a private investor like him — if he prepares now.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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Will the stock market crash? Who knows? Or, more accurately, yes it will, but who knows when?

Over time, stock markets rise and fall. But nobody knows exactly what will happen next.

At the moment, the global economy continues to face a number of challenges. Inflation has been stubbornly high and a number of leading economies are showing little or no growth.

But what might a stock market crash actually mean for a small private investor like me?

Perspective and timeframe

It might sound perverse, but a stock market crash would suit me just fine. It would give me a buying opportunity.

The stock market gives investors a regular update of a price at which they can buy or sell shares. This idea is captured in Ben Graham’s concept of Mr Market.

But, crucially, we do not have to act. So while shares we own may show a paper loss, we can hold onto them and it may be that in future they move up in price again. Meanwhile, a crash could see some perfectly good companies on sale for far less than they turn out to be worth.

As usual in the market, taking the long-term approach to investing has its advantages.

Spotting the bargains

But what if a stock market crash reflects a wider problem that actually affects the prospects of a particular company?

As an example, think about the financial crisis in 2008. If I had bought shares in NatWest (LSE: NWG) as they fell, thinking I was getting a bargain, I would have been wrong. I would also, 16 years later, be sitting on shares worth substantially less than I paid for them.

This reflects the fact that the 2008 stock market crash came about because of a financial crisis that affected the underlying business prospects of banks.

So when buying in a crash, it is important not necessarily to look at what is happening to the market overall but rather what is happening to an individual stock and whether the crash might change that.

Getting ready now

In practice, what does this mean? I think I could find value during a stock market crash – but I need to assess whether the reason for the crash has changed anything about the underlying investment. In the heat of a crash, I might not have time to do all that.

So I am acting now, keeping a watchlist of shares I think could be attractive to own in my portfolio, if I can snap them up at the right price.

At the moment, for example, I feel the NatWest share price is quite attractive. The bank saw profits rise last year, it has a strong brand with a big customer base – and its dividend yield is 6.1%.

But a risk I see is an economic downturn pushing up loan defaults and hurting profits, as it did in 2008. If the next stock market crash is due to similar circumstances, even a weaker Natwest share price might not tempt me.

But if a crash leads its price to fall sharply yet the outlook for bank profits look largely unaffected, it is the sort of share I would snap up.

A stock market crash could give me attractive buying opportunities – so I am preparing now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane 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.

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