This year’s stock market crash has taken the FTSE 100 back to levels last seen in 2011. As I write, the market remains volatile and many top shares are falling once more.
Buying shares now feels hard as the outlook for the economy remains very uncertain. However, this gloomy outlook could make this the ideal time to be buying. Remember the words of legendary US investor Warren Buffett, who says we should be greedy when others are fearful.
This ain’t over yet
Before I go any further I should say that I don’t think this stock market crash is over just yet. I think there’s a good chance we’ll see some more sharp falls at some point. The reason for this is that there’s still likely to be a lot of bad news to come, when companies report on trading in April and May.
We also don’t know how quickly the economy will get back to normal. Earnings forecasts for 2021 are currently fairly optimistic, in my view. City analysts seem to be expecting a pretty quick recovery. I hope this will be true, but I suspect that many businesses will need a couple of years to recover from the coronavirus pandemic.
Despite this, I think now could be a great time to be building a retirement portfolio.
Stock market crash = time to buy
Timing the exact bottom of the market isn’t usually possible. But in my experience, it doesn’t matter that much. What’s important is buying stocks when valuations are below average levels.
When the market starts to recover, you’ll then enjoy the benefits of mean reversion — when share valuations return to more normal levels. This may sound dull, but it’s not. Buying good companies at low valuations can give a serious boost to your investing profits.
For example, when the market sold off after the Brexit referendum in December 2016, shares in consumer goods group Unilever (LSE: ULVR) fell to a low of £31. If you’d bought the shares then, you’d still be up by 30% today, despite the stock market crash.
However, if you’d waited until Unilever’s share price recovered in June 2017 — only six months later — then your shareholding would probably be showing a loss today.
Free money
There’s another great reason to buy FTSE 100 shares during a stock market crash. Lower share prices mean higher dividend yields.
I see this as free money. Going back to my Unilever example, when the shares slumped in December 2016, Unilever’s dividend yield rose to about 3.7%. Six months later, when the stock was trading at about £42, the dividend yield had fallen to less than 3%.
What should you buy in this stock market crash?
Although many dividends have been cut or suspended this year, I believe many will bounce back quickly. Companies are preserving cash to protect them against the unknown impact of the pandemic. But when the outlook clears, dividends should be possible again, even if they’re at lower levels.
To find potential winners, I’d look for companies like Unilever with stable sales, strong profit margins and not too much debt. Even if the stock market crash continues, I think that good companies should perform well over the coming years.
I believe that buying now should help you to beat the market and retire early.
