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The stock markets have had a tough few days, but so far we are nowhere near a stock market crash in the UK. It is sometimes said that the market has lost 20% or more of its value in a short period of time.
Still, an accident could happen at some point. In fact, willpower It will happen at some point, but we don't know when. It could happen this week, or it could take decades.
Accidents can be sudden and sometimes short-lived, so it's a good idea to be prepared.
Instead of focusing on when It could happen, so I'm spending time preparing to try to take advantage of it.
Could I double my money?
I estimate I could even double my money.
This depends on two equally important elements. The first is that a stock market crash can often create a mismatch between the value of a stock and its current price. The second is that I am a long-term investor.
My approach
So my plan is to create a watchlist. now I would love to own equity stocks if I could buy them at the right price. Then I would be ready to take advantage of them if a crash brought them down far enough.
I specifically want to buy shares of great companies at a price considerably lower than what I think they are worth.
Hopefully, over time that could reward me in two ways: share price growth and also a higher dividend yield than buying the same shares at a higher price.
Putting theory into practice
To illustrate, let's consider a stock I own: Legal and general (LSE: LGEN).
I like its strong brand, broad customer base and proven business model. As the interim results released today (7 August) show, the business remains in good shape.
In fact, the interim dividend was increased by 5%, although smaller increases are expected from next year. Legal & General's dividend track record over the past two decades has been impressive.
Created with TradingView
Still, the stock is already yielding 9.3%. If I simply increased the value of my portfolio at 9.3% per year by reinvesting dividends, it would have already doubled in value in eight years. That's assuming the stock price remains stable and dividends remain at their current level.
That's never guaranteed: As the chart above shows, pay per share was cut after the 2008 financial crisis. If another stock market crash leads clients to withdraw funds, we could see another cut.
But what if you had bought the stock during the 2020 crash?
My purchase price would have been lower than before the crash. In five years, Legal & General's share price has fallen by 8%, but it is up 39% since its March 2020 low.
Not only that, but buying at a lower price would have meant I subsequently earned a higher dividend yield.
Note in the chart below how the dividend yield increased when the price fell in March 2020 (and in 2009).
Created with TradingView
I believe that if I buy carefully selected excellent stocks at a low price during the next stock market crash, I could realistically hope to double my money over the long term.