Image source: Getty Images
A stock market crash may seem like a shocking event. But it can also offer the smart long-term investor a great opportunity to buy world-class companies at a bargain price.
By doing that the next time there's a market crash, I think I'd aim to spend £35K to set up a portfolio eventually 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 lot of money and I would take some time to save it. It's also more than one year's worth of my Stocks and Shares ISA.
So I'm going to set up a Stocks and Dividends ISA now and start putting money away 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 change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
How can I aim for a million
So, how can I aim to turn £35K into a million pound portfolio?
The key here is to take a long-term approach to investing.
Assume I invest my £35K and it grows 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 over the long term is much harder to achieve than it sounds.
Using the crash to my advantage
This is where the idea of a stock market crash can help me. It can open up opportunities to increase my long-term benefits.
Take a property manager IM&G (LSE: MNG) for example.
If I were to buy the FTSE 100 It paid a dividend of 9.8%. That's already juicy and puts the share among the highest yields the FTSE 100 has to offer.
But go back a few points during the Spring 2020 stock market crash and M&G was trading at about 54% of its current price.
That means, if I had invested in stocks then, my investment would be now yields more than 18% per year.
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, strong industry, its well-established reputation and customer base. The dividend is attractive, with the latest increase announced last month.
On the other hand, the business has its work to continue doing well. The first half saw a complete outflow of client funds (except for the company's Heritage business), which would hurt both revenue and profits.
Nevertheless, I plan to hold onto my M&G shares. But if I had bought them during the crash of 2020 I would now be earning more from them.
Such opportunities can be fleeting, so it is important to prepare them well. I keep a shopping list of stocks that I would buy if I could find them at the right price.
I don't know when the next stock market crash will come. By preparing ahead of time, I think I improve my chances of turning £35,000 into a millionaire portfolio!
Source link
