Ever wondered just what sort of damage a stock market crash could wreak on your portfolio?
The usual definition of a crash is a 20% or more fall in value in a short timeframe. So a portfolio worth £1,000 could soon fall to a valuation of £800 – or lower.
But, as a long-term investor, just looking at the short-term ebbs and flows of the market does not interest me much. What is the bigger picture?
Learning from history
Let’s take a step back and consider a couple of the most recent stock market crashes.
One was the pandemic crash in 2020. Since then, the FTSE 100 is up 98%.
Before that came the financial crisis. From its low point in 2009, the FTSE 100 has risen 177%.
On top of that, investors in the index have been earning dividends along the way.
The current yield is 2.9%, but investors who bought during market slumps would be earning a higher yield even to this day if they held their shares. That is because yield is a function of dividends — and what an investor paid for the shares in question.
History does not necessarily repeat itself. But a key insight here is that, although the stock market suffered these crashes, it more than bounced back in the years that followed.
Is the big picture misleading?
Of course, focusing on the blue-chip index may not tell the whole story. After all, not all shares fare equally well during a stock market crash. Some may go to the wall altogether.
But the long-term performance data does point to some important truths.
The index rose considerably over time from the lows it hit during those crashes. It also ultimately rose above where it stood before them.
So, even if someone put £1,000 in before the crash and then saw their investment value crumble as markets tumbled (by almost 40% in 2009 and 30% in 2020), if they had been willing to hold on for recovery they would have seen their portfolio get back to where it had been when they invested – and later surpass it. This year has seen the FTSE 100 hit an all-time high.
This matters now, as always
That is a useful lesson when it comes to the value of taking a long-term approach to investing.
Nobody knows when the stock market will next crash. But I believe that no matter how bad that crash, over time a properly diversified portfolio of carefully chosen blue-chip shares ought to recover.
One share worth considering
One share I think investors eyeing market turbulence ought to consider for its long-term potential is M&G (LSE: MNG).
In 2020, the M&G share price fell several times to around £1.10. It is now close to £3 – and still yields 6.9%.
So an investor who bought back in March 2020 could now be earning a dividend yield of around 19%. Wow!
There were risks then, as now. As a financial services firm, M&G might see investors pull money from its funds if the market tanks. That could hurt earnings.
But with its strong brand in the asset management market, large customer base across multiple markets and deep expertise in the financial markets, I believe M&G has ongoing potential for the long term.
