The stock market crash in March has left many of sitting on big losses. I know I am. And if you were hoping to use your share portfolio to allow you to retire early, you may now be wondering if that will ever be possible.
In this article I want to explain why I think the outlook is probably better than it seems. I’ll also explain the one thing I think you can do to maximise your chances of recovering quickly from the 2020 market crash.
Don’t make this mistake
It’s pretty uncomfortable watching your retirement fund fall by 20% in a few days. This stock market crash has also brought widespread dividend cuts, adding to the pain for long-term investors.
You’ve probably been tempted to sell all of your shares and ride out the storm in cash. But I hope you haven’t done this.
First of all, by selling your stocks at market lows, you would have probably realised some big cash losses.
What happens next could be even worse. The truth is that throughout history, stock markets have always recovered. Unless you’re already in the market when it starts to rise, you’ll miss out on the big gains. You could easily end up paying more to buy back your shares than you sold them for.
+90% in five years?
Here are some figures showing how the FTSE 100 has bounced back after each of the three big stock market crashes in the last 35 years:
|
Crash date |
1-year gain from low |
5-year gain from low |
|
1987 |
+13% |
+75% |
|
2000/03 |
+27% |
+63% |
|
2008/09 |
+59% |
+90% |
By holding on to your shares through each of these stock market crashes, you’d have been in pole position to profit from the next recovery.
In many cases, you’d also have continued receiving a reliable stream of dividends. This would have added to your total return and provided fresh cash to buy more shares.
When I would sell in a stock market crash
Of course, there is one exception to this rule. If you realise that you own shares in a company that’s probably going to go bust, it makes sense to sell.
In my experience, there are two main reasons why companies fail.
A bad business: For some reason, the business itself has gone bad. Maybe the company’s business model has failed. Or perhaps a fraud has been uncovered.
A bad balance sheet: The second reason why I’d sell during a crash is if a company is in serious financial distress. This most often happens when a business has too much debt and cannot find anyone to refinance it.
In my experience, bad balance sheets often belong to bad businesses. If you find yourself invested in one of these, the best thing to do is to get out. Lesson learned.
Patience will win out
But if you’re invested in good companies with sensible finances, then I believe you should hold on to your shares during a stock market crash. Buy more, if you can. There’s a good chance that in five years, your shares will be worth a lot more.
Despite the troubled times we live in, I believe this patient, long-term approach to investing still gives us the best chance of building wealth and retiring early.
