It’s been a turbulent few days on the stock market. So far, however, we’re still a long way from a stock market crash in the UK, which is sometimes defined as the market losing 20% or more of its value in a short period of time.
Nevertheless, a crash could occur at some point. will happen at some point – we just don’t know when. It could happen this week, or it could take decades.
Crashes can happen suddenly and are sometimes short-lived, so it’s worth being prepared.
Instead of focusing on When it could happen, so I spend time preparing for it and trying to take advantage of it.
Could I double my money?
I guess I could even double my money.
This depends on two equally important elements. First, a stock market crash can often create a discrepancy between the value of a stock and its current price. Second, I am a long-term investor.
My approach
So my plan is to create a watch list Now of income stocks that I would love to own if I could buy them at the right price, and be ready to pounce if a crash pushes them down far enough.
I especially want to buy stocks of great companies at a price significantly lower than I believe they are worth.
Hopefully, this could pay off for me over time in two ways: an increase in the share price and a higher dividend yield than if I had bought the same shares at a higher price.
Putting theory into practice
To illustrate, let’s look at a stock I own: Legal and general (LSE: LGEN).
I like the strong brand, the large customer base and the proven business model. As the interim results published today (7 August) show, the company is still in good shape.
In fact, the interim dividend was increased by 5%, although smaller increases are expected from next year. Legal & General’s dividend history over the past few decades has been impressive.
Created with TradingView
Nevertheless, the stock already yields 9.3%. If I were to increase the value of my portfolio by 9.3% annually by reinvesting the dividends, I would have doubled its value in eight years. This assumes that the share price remains unchanged and the dividends remain at the current level.
However, that’s never guaranteed: As the chart above shows, the payout per share was cut after the 2008 financial crisis. If there’s another stock market crash that causes customers to withdraw their funds, there could be another cut.
But what if I had bought the shares during the 2020 crash?
My purchase price would have been lower than before the crash. Over five years, Legal & General’s share price has fallen by 8% – but since its low in March 2020, it has risen by 39%.
In addition, buying at a lower price would have meant that I would have subsequently received a higher dividend yield.
Notice in the chart below how the dividend yield increased during the price crash in March 2020 (and in 2009).
Created with TradingView
By purchasing carefully selected top stocks at a reasonable price during the next stock market crash, I believe I could realistically double my invested money in the long term!
The post “This is how I would try to double my money in a stock market crash!” first appeared on The Motley Fool UK.
further reading
C Ruane owns shares in Legal & General Group Plc. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article on the companies mentioned in this article are those of the author and as such 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 broad range of insights makes us better investors.
Motley Fool UK 2024
