Stock market crash! Here’s what I would do if the FTSE 100 drops 20%
Analysts warn of a stock market crash (again). the FTSE 100 fell 100 points on Friday, which brought out the harbingers of doom. Inflation is the main concern this time around. As price growth hits 5% in the US and 2.1% in the UK, many investors fear central bankers will be forced to crack down on stimulus to prevent the economy from overheating.
This means higher borrowing costs and less hot money pouring into assets like stocks. There is a big debate about whether the resurgence in inflation is temporary or built to last. But for now, the answer is no one knows. Even if this is the first case, investor nervousness could still trigger a stock market crash. So what would I do?
Any investor who buys stocks must accept that the FTSE 100 can collapse by 20% at any time. This is what the stock markets do. They go up, most of the time, but they crash quite often too. Most people will remember the dotcom crash of 2000, the financial crisis crash of 2008, and the Covid crash of last year. There have been many more along the way, now largely forgotten.
Yes, the FTSE 100 could drop
This volatility is the price that equity investors pay for the superior long-term returns they generate from stocks and stocks. Volatility is not a bad thing. This is undoubtedly a good thing.
I have practiced seeing a stock market crash as a great opportunity to buy stocks at a discount. I don’t find it easy to buy when everyone else is selling. I am at the mercy of the herd instinct, like everyone else. Yet I manage to seize the opportunity when it presents itself. If the FTSE 100 crashes by 20%, I would aim to buy more of my favorite UK stocks, at temporarily reduced prices.
I’m not afraid of a stock market crash
I can take this “risk” because I plan to keep my portfolio invested for the rest of my life. In retirement, and beyond. So all the money I put in this year could be in the market for another 30 years. This should give it enough time to appreciate in value.
Another advantage of a stock market crash is that I invest a regular monthly amount in a pension. If stock prices go down, I get more for my money. I also reinvest all my dividends. They pick up more stocks when stock prices are going down. When the markets recover, I will own more stocks than if they hadn’t collapsed.
Of course, a stock market crash can be traumatic. No one likes to see the value of their savings plunge. Like everyone else, I would feel better if the stock market rose 20% instead.
Not all actions are guaranteed to recover and any recovery may take some time. But history shows that in the longer term, stock markets recover from a crash. This should happen next time too. And the next …
The after market crash! Here’s what I would do if the FTSE 100 drops 20% first on The Motley Fool UK.
Harvey jones has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide range of ideas makes we are better investors.
Motley Fool United Kingdom 2021