The stock market has been fluctuating. The FTSE 100 has been up and down, but now stands exactly where it did a year ago. However, with a recession on the horizon, it could start to dip again.
Many people worry about falling share prices, but could they actually help me increase my wealth?
What happens when the stock market falls
I think it is helpful to understand what is going on when the stock market falls. That ‘market’ in reality is a collection of hundreds, if not thousands, of different shares. So talking about it falling is like talking about the British temperature going down. Maybe it is dipping in Pitlochry and Preston – but it might be rising in Padstow.
Although the average may move down, some shares will move up. On top of that, if I buy a share in Unilever or Barclays or any other firm today and hold it, I will still own that share tomorrow. The market may say it is worth less or more than I paid for it, but it is the same slice of the business. Unless I want to sell it or buy more shares, the current price of the share does not matter that much to me.
Should I buy?
But what if I do want to buy? After all, my long-term investing goal is to find great companies and then buy shares in them I can hold year after year.
A stock market tumble can give me a good opportunity to do that. Imagine a share falls, but I think the investment case for the business stays the same. I would basically have an opportunity to buy something I already thought was attractive but at a lower price. If it moves further down, I can keep doing the same.
The key point here for me as an investor is to be clear in my mind about why I think a share is falling. Has something fundamental changed about the investment case for the company, like a dramatic shift in its customer appeal? In that case, maybe the share price fall reflects a worsening outlook for future profitability.
Or has it fallen along with the market, even though the company outlook remains broadly similar? If so, it could be that other investors dumping the share presents me with an opportunity to buy it for my portfolio at an attractive price.
The shopping list
But if a great company is on sale, it might not last for long. Even if the stock market overall remains in the doldrums, the price of some blue-chip companies can rebound quickly.
That is why I always keep a shopping list of businesses I think have attractive business models and would like own if their share price was attractive. That way, if the price suddenly falls, I am ready to spring into action — and seize the opportunity while I can.
Whether or not this approach can make me rich depends on how the shares perform — and how much money I invest. But even with a modest sum, I hope it could help me improve my investment returns, by buying quality shares at a good price. I may not get rich — but hopefully I can get a little bit richer, at least.