The stock market crash meant the FTSE 100 plummeted several times in March. This sparked headline such as “FTSE 100 posts largest quarterly fall since Black Monday aftermath”. It’s enough to cause any sane person to question if investing is a good way to make money. Yet study after study shows that it is. Stocks outperform, bonds, gold and cash over nearly every time period and staying invested is one of the surest ways to make money once the market recovers.
This is why I’m continuing to drip-feed my investments and where necessary ‘average down’ and add to a shareholding I already have. If the market were to crash once again, which it could, then I feel well-prepared for that eventuality and indeed, see it as much as an opportunity as a threat.
The role of cash in a stock market crash
You may well have heard the saying “cash is king”. It’s true. Having cash available when a stock market plummets allows an investor to pick up bargains. Shares in Ashtead were as low as 29p in 2009 after the credit crunch. By the end of 2019 the share price has risen to well over £24, which is a phenomenal return over just a decade and doesn’t take into account dividends paid out along the way. This brings me to my second point, the role of being brave.
As humans, we’re prone to a number of in-built psychological realities that can and do often inhibit our ability to invest as successfully as we could. Being aware of the challenges around, for example, confirmation bias and risk aversion are key to questioning our own decision-making and becoming better investors.
It’s also vital to be brave during these market downturns, I feel. In a stock market crash, timing the market is incredibly difficult. But picking up shares, even if it’s not right at the bottom of the market is fundamentally a good idea. It’s not nice to look at a loss of 5% or 10% for a few months, but if you think long term, it’s highly likely that if you invest in good companies, the losses will only be temporary.
The key is to have faith and be brave. If you do your research and invest in good companies, then you massively increase your chances of making money from shares over time.
With all this in mind, my plan to profit from any future stock market crash is to add as much cash as I can to my accounts, drip-feed those investments into high-quality companies trading at a discount, and to be brave. Then I’ll wait until the market turns the corner and enters once more into a bull market so I can hold and watch my investments rise. I strongly believe investors must act during a downturn and not be fearful. It’s disheartening to see investments go down in value, but it’s also an opportunity to add new holdings to top-up what you hold.
Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.