Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational wealth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

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.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While I wouldn’t wish a stock market crash on anyone, savvy investors know a good opportunity when they see one. The trick to making the most of such an opportunity is being prepared.

As the saying goes: failing to prepare is preparing to fail. 

Nobody knows for sure when the next crash will come so it’s critical to keep some savings aside. With enough cash on hand, a cunning investor can grab the right stocks at the right time!

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

However, it’s important to understand the psychology of market downturns and have a strategy for taking advantage of lower prices. Turning £20k into half a million pounds is no easy feat – and involves some risk!

Here’s a breakdown of how I’d try to do it.

Maximise my ISA potential

Twenty grand is a fair bit of money so I’d need to spend some time saving to start with. It’s also the ideal amount to fill a Stocks and Shares ISA with the full yearly allowance. Using an ISA would help reduce any capital gains tax I pay on my returns.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Smart investors know that a market crash isn’t a reflection of individual companies’ long-term value. Many solid businesses experience temporary price drops simply because of market-wide panic. During a crash, well-established and financially sound companies often become available at a discount. 

So it’s important to identify which stocks have high intrinsic value but have been pulled down by the broader market.

Identifying quality stocks

Consider a stock like British American Tobacco. It’s provided annualised returns of 6% over the past 30 years. Certainly, there’s been some ups and downs in that time but overall, it’s proven a steady gainer. 

Currently, the dividend yield‘s over 8% but on average it’s stood around 5% for the past few decades.

Assuming those averages held, £20k invested would grow to almost £470,000 in 30 years, with dividends reinvested. Buying at the bottom of a crash would likely deliver even greater returns.

Don’t like tobacco? Let’s consider Legal & General (LSE: LGEN), the well-established £13bn UK insurance provider. Its annual dividend has increased at a rate of 13.3% a year since 2008, rising from 4p per share to 20p. 

However, it holds substantial liabilities tied to long-term policies, making it vulnerable to adverse market conditions that can affect its ability to generate returns on reserves.

That may be one reason the price is down 11% this year.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Looking long-term however, its 30-year annualised returns are also around 6%. The yield’s currently at 9.3% but on average it’s been around 6.5% since 2014. With those averages, £20k could grow to half a million in just 27 years.

Looking back to the 2008 financial crisis, the stock fell 75% that year. That would be like today’s 220p price falling to 55p. But in the 10 years following the crash, the price recovered at an annualised rate of almost 22% a year. 

If that happened again, a £20k investment could balloon to over £500,000 in less than 13 years! 

I wouldn’t put everything in one stock though. Rather, I’d aim for similar average returns by diversifying my investment across a portfolio of stocks. This helps to reduce exposure to industry- or company-specific risks.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

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.

Mark Hartley has positions in British American Tobacco P.l.c. and Legal & General Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »