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It sounds contradictory to say that falling stock prices could benefit my Stocks and Stocks ISA. The last time the market really crashed in 2020, my ISA portfolio lost more than a quarter of its value in a couple of weeks. So why do I say that an accident could be a blessing?
Well, the UK stock market has an amazing track record. Over the past four decades, the major crashes occurred in 1987 (called “Black Monday”) and in 2000, the rise and fall of dotcom technology. In addition, there was the global financial crisis of 2007/08 and the pandemic collapse of 2020.
In each case, the FTSE 100 it has recovered and turned on to reach new highs. This month alone, the index has hit a record high. If you had bought shares in each of those accidents, you would be sitting on some serious gains.
For example, in 1987, the Footise went from 2,367 to a low of 1,582 in December before bottoming out. He recovered his previous value in just over two years. Those investors who bought near the bottom would have doubled their money in six years!
Those are turbocharged returns compared to the FTSE 100’s 8% historical average annual return (with dividends reinvested).
Could an accident happen in 2023?
Stock market crashes can happen at any time. They are typically defined by double-digit declines in a major stock index within one or just a few trading days. However, the market can go down for days or even weeks after that. Could that happen this year?
The truth is that it is almost impossible to predict. But with the FTSE 100 this week hitting an all-time high, I am not surprised to start hearing such talk.
However, it is important for me to always keep in mind that some market participants are consistently bearish. These are known as the ‘permabears’. That is, those investors who are always negative about the future direction of the markets.
If you were to listen to them, you would be out of the market most of the time and therefore lose most of your profits. But his arguments can be very persuasive. Humans seem programmed to respond to negative rather than positive news.
Their arguments often sound smarter than bullish long-term investors, who sometimes seem to be investing on blind faith.
But as the old saying goes, “Even a stopped clock is right twice a day‘”. So I generally don’t listen to negative predictions from permabears. Instead, I’m still investing, I’m still optimistic, but I’m also preparing for the worst.
keep some powder dry
When I started investing, I wanted to buy stocks as quickly as possible. That’s pretty common and totally understandable. After all, I’m not going to get that average 8% return if I put cash in my Stocks and Stocks ISA.
However, as the years have passed, I have moved to having cash on hand in my ISA ready to use if the market crashes. Actually, I’m not expecting an accident, of course. But if it does happen, my cash stack will give me the opportunity to take advantage of every time high-quality stocks go on sale. History teaches me that the market has a habit of going back up.
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