Analysts are warning of a stock market crash (again). The FTSE 100 fell 100 points on Friday, and that brought out the doom mongers. Inflation is the main worry this time. As price growth hits 5% in the US, and 2.1% in the UK, many investors fear central bankers will be forced to reign in stimulus to stop the economy from overheating.
That means higher borrowing cost, and less hot money flooding into assets such as shares. There’s a big debate over whether the inflation resurgence is temporary, or built to last. But right now, the answer is nobody knows. Even if it’s the former, investor nervousness could still trigger a stock market crash. So what would I do?
Any investor who buys shares has to accept that the FTSE 100 could crash 20% at any time. That’s what stock markets do. They go up, mostly, but they crash pretty often too. Most people will remember the dotcom crash of 2000, the financial crisis crash of 2008 and last year’s Covid crash. There have been plenty more along the way, now largely forgotten.
Yes, the FTSE 100 could fall
This volatility is the price equity investors pay for the superior long-term returns they generate from stocks and shares shares. Volatility isn’t a bad thing. Arguably, it’s a good thing.
I’ve trained myself to view a stock market crash as a great opportunity to buy shares at a reduced price. I don’t find it easy, buying when everybody is selling. I’m at the mercy of the herd instinct, just like everybody else. Yet I steel myself to take the opportunity when it arises. If the FTSE 100 does crash 20%, I’d aim to buy more of my favourite UK shares, at temporarily reduced prices.
I’m not scared of a stock market crash
I can take this ‘risk’ because I plan to keep my portfolio invested for the rest of my life. To retirement, and beyond. So any money I invest this year could be in the market for a further 30 years. That should give it plenty of time to climb in value.
Another advantage of a stock market crash is that I invest a regular monthly sum into a pension. If share prices fall, I get more stock for my money. I also reinvest all my dividends. They pick up more stock, when share prices are down. When markets recover, I will own more shares than if they hadn’t crashed at all.
Naturally, a stock market crash can be traumatic. Nobody likes to see the value of their savings plunge. Like everybody else, I’d feel better if the stock market shot up 20% instead.
Not all shares are guaranteed to recover and any recovery might take some time. But history shows that, in the longer run, stock markets recover from a crash. It should happen next time too. And the next…
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021