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No one knows when we will see the next stock market crash. What there is no doubt is that sooner or later it will happen.
Markets are cyclical. Like Jeremy Irons' character in the movie. margin call As he reminds us, financial crises occurred in the 17th, 18th, 19th and 20th centuries.
This century is no different and we have already seen several stock market crashes, most recently in 2020.
But while a crisis can be a scary thing, it is also (as Irons' character reminds us) an opportunity to try to build wealth.
Here are two ways I would try to use the next stock market crash to achieve this.
Buy quality companies at clearance prices
The first, I think, is obvious. In the event of a crisis, the prices of many stocks plummet. In some cases, that is justified. The crisis marks the end of the previous normal situation for some and they may never fully recover.
However, in some cases, a stock's price falls to a level that seems unreasonably low, given the current outlook. That may present a buying opportunity.
As an example, consider the software group. Sage (LSE: SGE). Between February and March 2020, its shares plummeted 30%.
But did their business prospects really change?
At that time it was difficult to know. But with a large installed customer base, a product attractive to users who had already invested a lot of time training on it, and continued demand from small and medium-sized businesses, in February 2020 it could be argued that Sage's business should hold up. . the pandemic without problems.
Things developed more or less like this. Revenue fell in 2020 and again in 2021, before starting to rise again. But after-tax profits in both years were actually higher than in 2019.
Double the value of the investment in just four years
Sage shares have been booming, soaring 62% in the past year. If you had bought in February 2020, you would now be looking at a 55% gain in the share price. However, I took advantage of the stock market crash to buy just a month later and the value of my holding would now have more than doubled.
A crisis can lead to bargain prices for brilliant companies. So What should I do about it??It's one thing to try to prepare ahead of time by making a list of what I think are great businesses that I would love to have in my portfolio if I could buy them at an attractive price.
Making that list now means I'll be ready to act in what could be a brief but lucrative window of opportunity.
Higher performance
Lower stock prices can also mean higher returns. Imagine a stock pays 5p per share in dividends annually. If I buy it for £1, my return is 5%. But if I can take advantage of a stock market decline to buy the shares at 50p, my return will be 10%.
The current dividend yield of 8.9% in M&G I find it attractive (I already own the stock). But if I had bought the FTSE 100 share during the March 2020 stock market crash, my investment would now be returning 19.8%!
Same stock, same dividend per share. But a higher return, thanks to crisis purchases!
