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If the stock market crashes I still think its a good time to buy stocks

James J. McCombie
·4-min read
macro shot of computer monitor with FTSE 100 stock market data in trading application
macro shot of computer monitor with FTSE 100 stock market data in trading application

Stock markets are becoming more volatile. The second wave of the coronavirus has the potential to cause another full-blown stock market crash. The trouble is no one can say for sure that it will, or when it will be, how deep it will go, or how long it will last. Given there is a lot of uncertainty in the markets, it’s hard not to wonder if now is a good time to buy stocks or not. I believe it is, but I then again, I always do.

If I cannot get reliably time the market, then there is no point trying. So, I regularly invest no matter if the markets are up or down. It is challenging to buy when prices are falling. However, I know that if I am regularly investing for the long term, in a basket of stocks that I believe will be worth more in 10 years than they are now, I should be okay. In fact, market crashes can increase my wealth so long as I have the time to ride them out.

Stock market crashes

Let’s consider two scenarios for a fictional share. In both cases, the share price starts at 100p and ends at 185.12p But in one scenario the share price moves up a little each month, while in the other, the share price is a lot more volatile. The chart below shows how the price of this fictional share will behave over 120 months under both scenarios. I am going to invest £1,000 in this stock initially (which buys 1,000 shares) and then £100 each month for 119 months. In the first scenario:

graph showing two hypothetical share price paths over time one smooth the other with market crashes but both ending at the same price
graph showing two hypothetical share price paths over time one smooth the other with market crashes but both ending at the same price

With no market crashes, as the price rises ever higher, my £100 investments buy fewer and fewer shares as time goes by. Nevertheless, after 10 years I end up with 9,929 shares, which at a price of 185.15p each are worth £18,381.01. However, with market crashes, there are periods where a £100 investment buys more shares than it previously did. And so, in the market crash scenario, I end up with 10,337 shares, which at a final price of 185.12p are worth £19,135.42.

Market Crashes

No Market Crashes

Total Invested

£12,900

£12,900

Final Share Price

185.12p

185.12p

Number of Shares

9,929

10,337

Market Value

£18,381.01

£19,135.42

Average Share Price

129.92p

124.79p

Under the market crash scenario, the same investment was worth 4.10% more at the end than under the no market crash scenario. If the stock paid a dividend, then the difference would be greater. If I knew that the starting and ending share prices would be the same, I should prefer market crashes along the way. Of course, I would never invest in a single share, but rather a basket of them to diversify company-specific risk. This example used a single share only for simplicity.

Always a good time to buy stocks

Stock markets crash, that’s just something investors will have to get used to. But, since I am investing regularly in a basket of what I believe are quality stocks, I do not despair when prices start to tank. In fact, so long as I have confidence that the companies I invest in will grow larger over 10 years or so, I should prefer the stock prices to dip along the way. So, I always think now is the right time to buy into a basket of quality stocks.

The post If the stock market crashes I still think its a good time to buy stocks appeared first on The Motley Fool UK.

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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer 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 diverse range of insights makes us better investors.

Motley Fool UK 2020