Is the stock market looking increasingly frothy given an uncertain economy – or is it just getting started on the next leg up?
Only time will tell.
What we do know is that, sooner or later, there will be another market crash. Whether it is next week or a decade away, only time will tell.
That lack of certainty about timing gives me an opportunity. I can use the time now to prepare a plan of attack for what I should do as an investor when the crash does happen.
After all, when the market goes down, it may be possible to buy shares in excellent companies at far lower prices than was the case just days before – and hopefully than will be the case in their long term future.
I am hoping to be able to pull together a spare £50K to invest during the next significant stock market downturn. Here is how I would try to turn it into a million pound portfolio over the long run.
Getting ready, now
My first move would be to make sure I was ready administratively. For example, I could not put £50K into a standard Stocks and Shares ISA today, as there is an annual contribution limit of £20K. But by contributing over the next several years, I could build up the sum in an ISA.
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So, I would take time now to decide what the best Stocks and Shares ISA is for me. I would then start building up my investment funds for when the stock market offers me the sort of buying opportunity that can follow a crash.
Building a shopping list in advance
Although a stock market slump can send some great shares down in price, they may not stay cheap for long. So I would like to be prepared to act. That means doing my homework in advance.
To that end, I maintain a shopping list of companies I would like to own if I could buy them at the right price.
As an example, consider one share on my shopping list: Games Workshop (LSE: GAW).
Even today, it yields 3.5%. But if I had bought it back in the 2020 stock market crash, I could have picked it up for barely a third of its current share price. So, not only would the valuation of my holding have soared by close to 200%, but I would now be earning a yield of just over 10%.
I like Games Workshop as a business. It has a unique product offering, lots of intellectual property rights, large customer base and proven business model. But the current valuation puts me off buying the shares right now.
After all, the company faces risks including the importance of a small number of fantasy franchises to its business. If one goes out of fashion, profits could suffer.
I’d aim for a million
But if I could snap the shares up at that 2020 valuation again, I would. My compound annual growth to date would be far above 20%.
A 20% compound annual growth rate is unusual. But buying great shares in a stock market crash is one way I could aim to achieve it. Compounding the value of a diversified £50K ISA at 20% annually would make me a millionaire in 17 years.
