Many have said the stock market crash in the spring of 2020 is a once-in-a-lifetime opportunity to profit by investing in shares. But is it really? The short answer, I reckon, is ‘no’.
Stock market crashes are common
Although a set-back in the stock market can throw up opportunities to buy shares in companies at lower valuations, such reversals are common. For example, the last event on a magnitude comparable to the coronavirus-induced crash was the credit crunch. That one caused a bear market that ended just over 11 years ago.
Prior to the credit crunch, we saw the so-called ‘tech-wreck’. That bear market unwound the excesses of the snappily-labelled ‘dot-com boom’. The bear market switched back to bull again just over 17 years ago with that one.
So, although these major events have been separated by years rather than months, they hardly qualify as once-in-a-lifetime occurrences. And I reckon we can expect more of them in the years ahead. Indeed, you’ll probably see several in your lifetime.
But the great news is you don’t need a stock market crash to build wealth from shares over your investing career. Timing the markets is always difficult anyway. The most important thing is time in the markets.
I admit it helps if you can invest when shares are depressed. Because there’s usually an opportunity to own a slice of the underlying business at a better valuation. And, as operations recover, you’ll often see your shares recover too, which could boost your investment performance. Indeed, such an approach is the bread and butter of long-term-focused investors such as Warren Buffett.
Compounding your way to riches
But Buffett doesn’t run scarred every time the markets dip while he’s holding shares. He judges his buy and sell decisions according to the underlying value he’s seeing. And one of the main components of value is the quality of the business and its prospects in the markets it serves.
Indeed, if you focus on quality and invest with a long-term investment horizon in mind, it’s almost always a good time to be in the stock market. The key to building wealth from shares, as demonstrated by Buffett and others, is to compound your money.
And one of the key variables of the process of compounding is time. The longer the period of compounding, the larger the investment pot is likely to grow. And the awesome thing about compounding is it works exponentially – time really is your friend if you’re holding the shares of high-quality businesses.
It’s a good time to go shopping for shares right now because, in some cases, the valuations of high-quality businesses are depressed. But it’s not a once-in-a-lifetime opportunity. The opportunity with the stock market is that you can own quality shares for a long time and compound your investments.
If you keep doing it no matter what the general stock market does, you could get rich with shares.