The thought of investing your money during a market crash can be scary. Some would argue it is downright barmy. And on first reflection, you can see their point. But it makes sense when you really think about it.
Most of us buy shares with a view to holding them for five or 10 years. In some cases for much, much longer. Over that sort of timescale, the price drops that many investors have recently endured tend to be ironed out. Provided, of course, that said investors haven’t packed their shares portfolio with duds.
Remember that the average long-term investor tends to enjoy an average annual return of between 8% and 10% on their stock holdings. So market crashes, whilst inconvenient, don’t tend to harm share pickers’ ability to make big returns on their investments. In fact, crashes allow them to maximise their returns by buying at even cheaper levels. It could even boost their chances of making a million.
Switch out, switch in
It’s a good idea to have cash on hand in order to capitalise on these buying opportunities. I realise that times are tough. It may be more difficult for investors to have the funds to buy shares right now. There are plenty of people too, who might be able to buy but want to keep extra cash on hand as an insurance policy as economic conditions worsen.
It’s still possible for investors to play the market crash in both these scenarios, though. You can always sell part or all of your shares in certain companies to buy other stocks that are too cheap to miss, and/or that have better growth or income prospects following the Covid-19 outbreak.
Hold shares in highly-cyclical Lloyds Bank, for instance? Why not sell these to snap up some National Grid stock? The latter company has the sort of defensive operations, and the balance sheet strength, to keep paying above-average market dividends well into the 2020s. Lloyds, meanwhile, has had to axe dividends as per Bank of England advice. And it’s unlikely to begin paying dividends again soon either, given the poor economic outlook and with interest rates still collapsing.
Play the market crash
It might be tempting to lock up your money in a low-risk product like a Cash ISA right now. However, such a strategy threatens to destroy your chances of making any sort of decent return on your hard-saved capital. Even the best-paying Cash ISA on the market only offers an interest rate of around 1%. By the time you factor-in the impact of inflation, well, you’ll probably be left with a great big hole in your pocket.
It’s likely that a large number of ISA millionaires have made their wealth thanks in large part to clever timing. The idea that you and I can make a million from share investing isn’t just a pipe dream. By seizing the opportunity, and buying cheap shares following a market crash, you can make your chances of getting rich even further.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.