Investors are feeling anxious as they worry about the prospects of a next stock market crash. A second wave of Covid-19 appears to be washing across Europe before the first one has even passed. The FTSE 100 is perilously close to dipping below 6,000 again. Should you be worried?
The pandemic has triggered a massive economic shock. We’re living through the fastest GDP contraction in history.
History shows that in a bear market you often get more than one crash. It happened during the financial crisis in 2008. Investors were just beginning to relax when along came stock market crash part 2.
The FTSE 100 could fall further
It could happen again. Millions of jobs are disappearing. The shock will be felt in October, when government furlough schemes end. If that combines with an upsurge in infections, sentiment could crash and the stock market may follow.
At the Motley Fool, we believe a crash is the ideal time to trawl the stock market for bargain shares. You can pick up top FTSE 100 stocks at bargain prices, as good companies get sold along with the bad.
This leads to a tricky question though. If a crash is a good time to buy shares, should you hold off until the market falls again?
If only if it were so easy. The big problem is that a stock market crash is almost impossible to predict. If you hang around waiting for one, you could be waiting years. During that time, share prices could rise higher and higher, leaving you cooling your heels on the sidelines.
Don’t wait for stock market crash 2
Also, you won’t earn any dividends in that time, and this is what really turbo-charges your long-term returns.
Buying in the middle of a stock market crash is also fraught. As we saw in March, many people held off, expecting share prices to go lower and lower. The truth is that you’ll never time the bottom of the market perfectly.
I think the best thing you can do right now is feed money into the market, whenever you have a little to spare. Remember, the FTSE 100 is more than 20% below its January peak of 7,674. So you’re already buying shares at bargain prices today.
Many stocks have fallen more than 50% in the stock market crash so you may be getting an even bigger discount. I’d look for companies with strong balance sheets, steady revenues, loyal customers, and minimal debt. That should give them the strength to survive whatever the pandemic throws at us, and ultimately benefit from the recovery. A dividend at some point would also be nice.
I would go shopping for bargain shares today. If the stock market crashes again, I would buy more shares at the new lower price.
Then stay invested for the long term and reinvest all your dividends. That will build the wealth you need to get rich and retire early.