A stock market crash can be frightening. Portfolio values plunge, economic forecasts worsen, and investors begin to question whether they should sell before things get worse. But for prepared investors, a crash can also create opportunities to build substantial wealth. Some of the world’s best businesses can suddenly become available at prices that seemed impossible just months earlier.
The challenge is knowing what to buy and having the patience and financial resources to act.
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Three things can make a significant difference:
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The right time horizon.
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A shopping list of great businesses.
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Capital set aside to take advantage of opportunities.
The right time horizon
The first requirement is a long investment horizon. If you need your money next year for a house deposit or other major expense, a market crash can be disastrous. You might be forced to sell investments at depressed prices.
But if you are investing money you won’t need for the next 10 years, or longer, you have more flexibility to withstand temporary declines and allow businesses to compound their earnings.
Consider a company whose share price falls 40% during a market panic, even though its competitive position and long-term earnings prospects remain intact. An investor with a long time horizon can potentially benefit from the lower price. Someone who needs the money immediately may have no choice but to sell.
The key is to invest with money you can afford to leave untouched, rather than money you might need in the near future.
A shopping list of great businesses
Imagine your favorite supermarket announcing a 30% discount. You would probably know which products you want before walking through the doors.
Investing should work the same way. Rather than scrambling to find stocks during a market crash, prepare a list of businesses you would love to own at the right price.
For example, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is an interesting company to watch. It owns Google Search, YouTube, and Google Cloud, while investing heavily in artificial intelligence (AI). These businesses give it several ways to benefit from the growing use of AI.
Another example is Amazon (NASDAQ: AMZN). Its e-commerce operations, cloud computing business, and advertising division provide multiple sources of growth. AWS also gives Amazon exposure to rising demand for AI computing.
