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Will the stock market crash? Who knows? Or, more accurately, it will, but who knows when?
Over time, stock markets rise and fall. But no one knows exactly what will happen next.
At this time, the global economy continues to face a number of challenges. Inflation has been persistently high and several leading economies are showing little or no growth.
But what could a stock market crash really mean for a small private investor like me?
Outlook and timeline
It may sound perverse, but a stock market crash would be very good for me. It would give me a buying opportunity.
The stock market provides investors with a regular update on the price at which they can buy or sell shares. This idea is reflected in Ben Graham's Mr Market concept.
But the most important thing is that we don't have to act. So while the shares we own may show a loss on paper, we can hold on to them and they may go up in price again in the future. Meanwhile, a crisis could cause some perfectly good companies to go up for sale for much less than they are worth.
As is common in the market, taking a long-term investment approach has its advantages.
Spotting the bargains
But what if a stock market decline reflects a broader problem that actually affects the prospects of a particular company?
As an example, let's think about the financial crisis of 2008. If you had bought shares of NatWest (LSE: NWG) as they fell, thinking I was getting a bargain, I would have been wrong. Also, 16 years later, I would have shares that were worth substantially less than what I paid for them.
This reflects the fact that the 2008 stock market crash occurred due to a financial crisis that affected the banks' underlying business prospects.
Therefore, when buying in a crisis, it is important to not necessarily look at what is happening in the broader market, but rather what is happening to an individual stock and whether the crisis could change that.
Getting ready now
In practice, what does this mean? I think I could find value during a stock market crash, but I need to evaluate whether the reason for the crash has changed anything in the underlying investment. In the middle of an accident, you may not have time to do all that.
So I'm acting nowMaintain a watch list of stocks that I think might be attractive to have in my portfolio, if I can acquire them at the right price.
At the moment, for example, I think NatWest's share price is quite attractive. The bank saw its profits increase last year, it has a strong brand with a large customer base and its dividend yield is 6.1%.
But one risk I see is an economic crisis that increases loan defaults and hurts profits, as happened in 2008. If the next stock market crash is due to similar circumstances, not even a weaker Natwest share price I might not be tempted.
But if a crisis causes its price to fall sharply but bank earnings prospects don't seem to be greatly affected, it's the kind of stock I'd buy.
A stock market crash could provide me with attractive buying opportunities, so I'm preparing now.
