A stock market crash can seem like an alarming event. But it can also offer the savvy long-term investor an excellent opportunity to buy into world-class companies for a cheap price.
By doing that the next time there is a market crash, I think I could realistically aim to use £35K to set up a portfolio that is ultimately worth a million pounds. But waiting for the crash may be too late – I need to prepare now.
Getting money to invest
£35K is a substantial amount and I would take time to save it. It is 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 putting money in to try and have £35K ready to invest in a tax-efficient way.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
How I’d aim for a million
So, how could I aim to turn £35K into a million-pound portfolio?
Crucial to this would be taking a long-term approach to investing.
Imagine I invested my £35K and it grew at a compound annual rate of 15%. After 24 years, I would be a millionaire.
The challenge is that a 15% compound annual growth rate on a long-term basis is a lot harder to achieve than it might sound.
Using a crash for my advantage
That is where the idea of a stock market crash could come to my assistance. It can throw up opportunities to increase my long-term returns.
Take asset manager M&G (LSE: MNG) as an example.
If I was to buy the FTSE 100 share today, I would get a prospective dividend yield of 9.8%. That is already juicy and puts the share among the very highest of FTSE 100 yields on offer.
But go back to several points during the Spring 2020 stock market crash and M&G was selling for around 54% of its current price.
That means that, had I invested in the shares at that point, my investment would now be yielding over 18% annually.
Making the right move, at the right time
As it happens, I hold M&G shares. I like the asset manager’s focus on a large, resilient industry, its well-established reputation and customer base. The dividend is attractive, with the latest increase announced just last month.
On the other hand, the business has its work cut out to keep doing well. The first half saw a net outflow of client funds (excluding the company’s Heritage business), which could hurt both revenues and profits.
Still, I plan to hold my M&G shares. But if I had bought them during the 2020 crash I would now be earning a lot more from them.
Such opportunities can be short-lived, so it is important to be well-prepared. I keep a shopping list of shares to buy if I can snap them up at the right price.
I do not know when the next stock market crash will come. By getting ready ahead of time, I think I improve my chances of using it turn £35,000 into a million-pound portfolio!
This post was originally published on Motley Fool
