Recent market jitters have left many investors worried that the stock market could crash in 2020. The growing economic impact of coronavirus seems to have increased the chances of a slump, at least in the short term.
Today, I want to explain why I think we worry too much about market crashes. If you’re a long-term investor, then a crash can be a rare opportunity to buy great businesses at bargain prices.
Buy the crash
In a market crash, the price of popular stocks might fall by 20% in a matter of weeks. Does this mean these companies are worth 20% less than they were before? It seems unlikely to me.
Take consumer goods giant Unilever. This FTSE 100 firm can trace its roots back to 1871. Today, it sells over £50bn of products each year all over the world, under dozens of brands such as Lipton, Cif, Domestos and Hellmann’s.
A stock market crash is unlikely to affect Unilever’s sales or profits. Although demand for some products might weaken during a recession, history suggests this will be a temporary pause in the group’s long-term growth.
If Unilever shares fall during the next market crash, I’ll want to buy them, not sell them.
In the 2008/9 stock market crash, Unilever shares held up relatively well. From their 2007 peak to the lows of March 2009, the stock only fell by around 30%. Within a year, the share price had regained its previous high. Buyers who bought at the bottom enjoyed a quick 50% gain.
In fairness, some businesses suffered more extreme sell-offs during this big market crash. Shares of Royal Dutch Shell fell by 40% between May 2008 and October 2008. Plumbing supplies group Ferguson fell by 85% between June 2007 and February 2009. easyJet lost 60% of its value between April 2007 and July 2008.
However, in every case, the share prices of these companies quickly recovered and have since risen to trade at much higher levels.
Many of the investors who put cash into the stock market in 2008 and 2009 went on to enjoy life-changing profits. A fair number of people became millionaires, simply by buying companies whose shares had become too cheap to ignore. Going against the trend like this isn’t always easy. But the rewards can be huge.
What I’d do now
Maybe the market will crash this year. Maybe it won’t. There’s no way to be sure. What I’d do is to stay invested in stocks, but allow some cash to build up in my portfolio, perhaps from dividends. I might also consider selling any positions where I have doubts about the quality of the business.
I’d then build a list of stocks that I’d like to buy at cheaper prices. This would probably include some of the stocks I already own and would like more of. Think about what price you’d be happy to pay. For example, I’d be a ready buyer of Unilever if I could get a 4% dividend yield. That implies a share price of about 3,700p.
Once all that’s done, I’d carry on as normal. If and when the storm comes, start buying and then wait for the market to recover. More than 100 years of stock market history suggests this is a safe bet — all you need is to keep a cool head and be patient.
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Roland Head owns shares of Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended Unilever. 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.