This year’s stock market crash and recovery has been traumatic and confusing for investors. Those who panicked and sold when the FTSE 100 fell more than 2,500 points will be kicking themselves as markets rebounded almost as quickly.
A stock market crash is not the time to sell shares, it is the time to buy high quality businesses, while they trade at reduced prices.
History shows that stock markets always recover after a downturn. Those who take the opportunity to buy cheap FTSE 100 shares when they are down have a much better chance of building a portfolio big enough to help them retire early and in comfort.
I’d buy cheap shares today
Everybody loves a sale. It’s an opportunity to buy high-quality goods at reduced prices. A stock market crash is like a sale. Suddenly, the companies you covet are available at reduced prices. You have to choose carefully, rather than splurge money everywhere. Focus on companies with strong balance sheets, loyal customers, a defensive aspect against competitors, and generous cash flows.
The problem is that too many investors lose their nerve. They expect markets to fall further, and miss the buying opportunity. Too many prefer to buy when the economy is growing and the outlook is bright. In other words, when shares are expensive. It makes far more sense to buy when stocks are cheap during a crash, and potentially much better value.
Markets recover after a crash
Nervousness in the face of a stock market crash is understandable. The big fear is that share prices will fall further, and never recover. Especially when the crash is as dramatic as the recent one. Yet markets can bounce back surprisingly quickly, as we have seen.
This particular recovery has been given a massive helping hand by monetary and fiscal stimulus. That called an instant halt to the stock market crash in March. By some calculations, money flowing into the economy is equivalent to global GDP. That is likely to drive share prices higher in the longer run. That means there is still a buying opportunity today, provided you remember the following.
Investing is a long-term game
Too many investors are shortsighted. They buy shares today hoping they will be higher tomorrow, and panic at the thought they may be lower instead. This is all wrong. You should be looking to hold your shares for at least five years, and ideally 10, 20, 30 or 40 years. That is how long most people have to invest for retirement.
Those who were too nervous to buy shares during the stock market crash in March have forgotten this point. You should not be aiming to make a quick buck from falling stock markets, but building long-term wealth. If you keep your eyes on the ultimate goal, you will feel much more confident buying shares when prices are down.
That way you can use the stock market crash to get rich and retire early.