Are we in a stock market crash? Nobody really knows the answer to that question. But as a long-term investor, history is on my side. Every now and again, the stock market takes a tumble. With deep and swift declines, it’s often due to a shock of some kind.
For instance, the most recent stock market crash came at the onset of the pandemic in March 2020. The uncertainty of the situation caused the FTSE 100 to fall by over 30% within just one month. Markets hate uncertainty. Once some measures were put into place by governments around the world, some of that uncertainty abated and the stock market bounced back.
That said, not every stock market crash will behave in the same way. Sometimes a situation can become worse. The largest crash in recent history was the global financial crisis of 2008. It resulted in a near-50% fall in the FTSE 100 that lasted over a year.
Stock market crash lessons
So what can we learn from past crashes? History shows that as I’m a long-term investor, falling share prices can often be an opportunity to buy at a discount. It’s difficult to determine how far share prices can fall in a crisis. That’s why I’d drip-feed some money, say £500 a month into buying a basket of quality shares. That way, it smooths out fluctuations in the market and I don’t need to try to guess where the bottom might be.
After every crash, the new stock market leaders are often different compared with the previous market cycle. For instance, leading up to 2008, bank shares performed relatively well. But the new leaders for the next decade turned out to be technology shares, and many bank shares failed to recover to their former highs.
Instead of guessing which set of shares could be the new leaders in the next market cycle, I could instead just focus on reasonably priced, quality companies with structural long-term growth. I’d also spread my risk by diversifying across several sectors.
Quality shares on sale
For instance, the UK has a chronic housing shortage so I reckon a housebuilder like Persimmon will continue to build houses and the shares should perform well over time.
Some companies like Diageo own established brands that have been built over hundreds of years. These iconic names like Guinness have withstood the test of time and are likely to continue thriving for many years. Both shares are reasonably priced, but stock market uncertainty could send their prices lower. If that happens, my drip-feed plan will be ready.
We have over 100 years of stock market history that includes deep recessions and world wars. One thing I know for sure is that after every crisis that I can recall, the stock market recovered. The near term is uncertain and share prices can remain volatile for some time. But for a patient investor like me, I feel the best days could be yet to come.