One of the facts of life for an investor is that shares go down as well as up. Sometimes, they go down a lot, and we end up calling the event a stock market crash. But these things can be transitory. Indeed, another fact of life for an investor is that shares can go up as well as down.
Last week, for example, the markets were plunging. This week they’re snapping back up again. Even the big move down in the spring was followed by a powerful move back up again for many stocks. And some have even exceeded their pre-coronavirus-crisis highs.
Fighting emotions a stock market crash can arouse
But I admit, big movements in the stock market can stir up some powerful emotions. Last week, I’m guessing many people, like me, were fighting to suppress negative feelings and worrying about the potential for a big stock market crash. This week, those same people will be trying to keep a lid on feelings of elation because the shares in their account are rising again.
However, shrewd investors such as Warren Buffett have known for decades that such emotions can send investors in the wrong direction. When we are all worried about crashing markets and thinking about selling our shares, we really should be considering buying. And when we feel elated, it’s probably worth being cautious about buying stocks.
Indeed, the stock market crash of 2020 did a good job of knocking the froth from the valuations of some great companies. So, I think that in the middle of all the market volatility we’ve been seeing, there are some decent opportunities to buy cheap shares with good-quality underlying businesses.
And buying cheap shares is a good idea for me because I plan to hold them for a long time. In fact, I think a programme of investment now could help me use the stock market crash of 2020 to retire wealthy. Indeed, the opportunity now is that good-quality businesses and their shares could recover in the next bull market.
There could be prosperity ahead
But it’s not only the stock market that will likely recover. I also believe the world economy will recover. And, over the next couple of decades, I think I could see the businesses behind my shares benefit from a new era of growth and prosperity. Indeed, if I choose carefully, some of my shares will likely deliver outstanding returns from today’s level as they prosper and expand their operations.
Meanwhile, I’ll be sure to reinvest all my returns along the way, such as dividends. And in that manner, I’ll be compounding my returns. So, rather than fearing another stock market crash, I’m preparing for one by keeping my watchlist of attractive stocks up to date. If share prices dip and offer quality bargains, that’s the time for me to pounce and buy those investments.
Here's one I've been watching:
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Kevin Godbold has no position in any 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.