Is a stock market crash good or bad for investors looking to build long-term wealth?
I think the answer could be either.
Buying high and selling low can be a painful experience. But just because the stock market sinks does not mean investors need to make a loss by selling.
After all, if I own shares in what I think is a great company, movements in its share price do not typically affect my view of the attractiveness of the business.
But what they could do is give me a short-lived and potentially lucrative buying opportunity. If we see a stock market crash in 2024, here is how I plan to react.
Timing the market
Let me start by saying I do not know whether the stock market will crash in 2024. Actually, nobody does.
Rather than trying to time the market, I am considering the prospect of a crash from the perspective of a value hunter. If prices go down far below what I think shares are worth, that could help me buy stakes in quality FTSE 100 companies at bargain-basement prices.
Instead of aiming to guess when that might next happen, I am putting my energy into pulling together an action plan so that I am ready to react when it does.
Value on sale
But if shares really are good, why would they suddenly see a price crash?
Sometimes it can because the City fears a business is worth less in a worsening economy. For example, banks like Lloyds and Barclays currently trade on what seem like cheap valuations.
But if a market crash is part of a wider economic adjustment that leads to higher default rates (as in 2008), those banks could yet turn out to be expensive, even at today’s share prices.
Sometimes in a crash though, high-quality shares tumble simply because fear stalks the City. From M&G to JD Sports, several shares I own have fallen in value at some point in the past few years to well below what I considered to be their real value before rising again.
Exploiting a market crash
Such opportunities can be lucrative – but they may also be short-lived.
Millions of other investors are doing exactly the same as me, namely looking to scoop up shares when their prices have been battered. That could mean those prices rebound.
So I feel my best chance of success will come from being well-prepared ahead of time. That way, no matter when we next see a stock market crash, I will be ready to try and use it to build wealth by snapping up top-grade shares at low prices.
But the time for me to lay the groundwork is right now.
