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A stock market crash may seem like an alarming event. But it can also offer the smart long-term investor an excellent opportunity to buy world-class companies at a cheap price.
By doing that the next time there is a market crash, I think you could realistically aim to use £35,000 to build a portfolio that will ultimately be worth a million pounds. But waiting for the accident may be too late; I need to prepare now.
Get money to invest
£35,000 is a considerable amount and would take me a while to save up. It's also more than a single year's allowance for my stocks and Shares ISA.
So I would set up a stocks and Shares ISA now and start investing money to try to have £35,000 ready to invest in a tax efficient way.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
How would I aspire to a million?
So how could you hope to turn £35,000 into a million-pound portfolio?
For this it would be crucial to adopt a long-term investment approach.
Imagine I invested my £35,000 and it grew at a compound annual rate of 15%. After 24 years, he would be a millionaire.
The challenge is that achieving a 15% compound annual growth rate over the long term is much more difficult than it seems.
Using an accident to my advantage
That's where the idea of a stock market crash could come to my aid. It can generate opportunities to increase my returns in the long term.
Take asset manager M&G (LSE: MNG) as an example.
If I had to buy the FTSE 100 share today, it would obtain a potential dividend yield of 9.8%. This is already juicy and puts the stock among the highest FTSE 100 returns on offer.
But go back to several times during the spring 2020 stock market crash and M&G was selling for around 54% of its current price.
That means that if I had invested in the stock at that time, my investment now would be with a return of more than 18% annually.
Take the right step, at the right time
I happen to own M&G shares. I like the asset manager's focus on a large and resilient industry, its well-established reputation and client base. The dividend is attractive and the latest increase was announced just last month.
On the other hand, the company has a lot of work ahead to continue functioning well. The first half saw a net outflow of client funds (excluding the company's Heritage business), which could hurt both revenue and profits.
Still, I plan to hold on to my M&G shares. But if you had bought them during the 2020 crisis, you would earn much more with them now.
These opportunities may be short-lived, so it is important to be well prepared. I keep a shopping list of stocks to buy if I can get them at the right price.
I don't know when the next stock market crash will come. By preparing ahead of time, I think I improve my chances of using it and turning £35,000 into a million pound portfolio!
