The stock market’s had a bit of a wobble this month. With war breaking out in Iran, energy, fertiliser, and other supply chains have all been disrupted, triggering a wave of fear among investors and economists that inflation could be about to make a nasty about turn.
The FTSE 100 saw just over 6% of its value drop in the space of a week as investors rushed for the exits. That’s still way below the 20% threshold of a full-blown crash. But if the war turns into a protracted conflict and energy costs indeed skyrocket, a market meltdown could be on the horizon.
But this might create a once-in-a-lifetime opportunity for some investors to build an impressive seven-figure portfolio.
An unusual opportunity
Stock market crashes create painful and vivid memories for investors. Yet, in reality, they’re pretty rare. In fact, we’ve only seen two in the last 20 years – the 2008 financial crisis, and the 2020 Covid crash.
Investing in top-notch companies when stock prices are in freefall is a proven strategy for earning market-beating returns. Even when relying on index funds, the gains can be game-changing.
In March 2020, at the peak of the pandemic-related crash, the FTSE 100 fell to a low of 4,922 points. The smart investors took advantage. And by reinvesting dividends along the way, they’ve gone on to earn a 16.7% total annualised return.
Just to put this in perspective, when investing £500 a month at this rate, the journey from £0 to £1,000,000 only takes 21 years!
In other words, for investors with around two decades remaining before retirement, a stock market crash in 2026 could be a last chance to retire as a millionaire.
Supercharging portfolio returns
Earning a 16.7% annualised return is pretty incredible. Yet it might be just the tip of the iceberg for stock pickers. While index investors have earned a lot of money since 2020, Rolls-Royce (LSE:RR.) shareholders have made even more.
After collapsing over 50% in March 2020, investors who saw the recovery potential once travel restrictions and lockdowns were lifted have enjoyed a jaw-dropping 48.8% annualised return today – enough to turn a £500 monthly investment into a seven-figure portfolio in less than a decade.
Buying the dip
The rearmament of NATO is creating a powerful tailwind for the group’s defence segment. Its leading civil aerospace division also enjoys the benefit of long-term service agreements, ensuring a continuous stream of high-margin aftermarket work tied to flying hours. And with its small modular reactors on track to take the stage in the 2030s, Rolls-Royce could soon see a new growth engine enter the mix.
Of course, a prolonged inflationary recession does pose a significant short-term risk. Higher fuel costs translate into higher ticket prices for travellers whose wallets are likely already going to be under pressure due to larger electricity and food bills.
Higher energy prices will also adversely impact Rolls-Royce’s manufacturing margins across all of its segments, putting further pressure on cash flows.
Nevertheless, with the balance sheet now in a much stronger position, the firm could be able to navigate such a downturn and emerge as a long-term winner. That’s why, despite the risks, if the stock market does decide to throw a tantrum, investors may want to consider this engineering giant for their portfolios.
