We’ve had one stock market crash this year, and many fear we could be in for another. While the worst of the pandemic may be over, the economic consequences have mostly been postponed, and could come to bite us after furlough support ends.
If you are investing for the long term, a stock market crash is nothing to be afraid of. In fact, you could turn it to your advantage, by taking the opportunity to buy FTSE 100 shares on the cheap, then patiently waiting for them to recover.
I’m not saying a stock market crash will happen. Nobody can predict the future in that way. At the start of the year, nobody was predicting the kind of crash we saw in March, where the FTSE 100 lost a third of its value.
Stock market crash bargains
It’s the same when markets climb. Few predicted the sharp rebound from 23 March, when the US Federal Reserve and other central bankers flooded markets with liquidity.Â
The one thing you can do is take advantage of a stock market crash after it has happened. I’d do that by going bargain hunting for your favourite FTSE 100 stocks, which will suddenly be going cheap. You can prepare now, by building up a war chest of cash, and adding companies to your watchlist.
I don’t think now is the time to take a punt on truly risky areas of the economy, such as airline and cruise stocks. They face a long haul back to profitability. Just look at the havoc closing air corridors has wreaked.
Instead, I would target companies with healthy balance sheets and strong cash flows. I would prioritise those that haven’t needed to take advantage of government support schemes during the pandemic, and continued to pay dividends. This should be a sign that they can withstand another downturn. If you can buy them after a stock market crash, all the better.
The FTSE 100 will recover
Buying shares after prices have crashed can be nerve wracking, but you have to remember that investing is a long-term game. History shows that stock markets always recover from a correction, provided you give them time.
If you would be happy to hold the stocks on your watch list for at least five years, and preferably much longer, you don’t have to worry about the pace of the recovery. Ultimately, it will come.
I’m not recommending you only invest if we get a stock market crash. For all I know, the worst may already be over. Markets could start steadily climbing from here. I actually think today is a good opportunity to buy FTSE 100 shares, as the market is down around 20% since its January peak. There are plenty of bargains out there right now.
If we do get a stock market crash, then I would accelerate my buying, as there will be even more bargains.