It sounds counterintuitive to say that crashing share prices could benefit my Stocks and Shares ISA. The last time the market genuinely crashed in 2020, my ISA portfolio lost over a quarter of its value within a couple of weeks. So why do I say a crash could be a boon?
Well, the UK stock market has an amazing track record. Over the last four decades, the major crashes were in 1987 (called ‘Black Monday’) and in 2000, the dotcom technology boom and bust. Additionally, there was the 2007/08 global financial crisis and the 2020 pandemic crash.
In every instance, the FTSE 100 has recovered and powered on to reach new highs. Just this month, the index has reached a record level. If I’d scooped up shares in each of those crashes, I’d be sitting on some major gains.
For example, in 1987, the Footise moved from 2,367 to a low of 1,582 in December before bottoming-out. It recovered its previous value in a little over two years. Those investors who’d bought near the bottom would have doubled their money inside six years!
Those are turbocharged returns compared to the 8% annual historical average return of the FTSE 100 (with dividends reinvested_.
Could a crash happen in 2023?
Stock market crashes can happen at any time. They’re usually defined by double-digit falls on a major stock index within one or just a few trading days. However, the market can go down for days or even weeks after that. Could that happen this year?
The truth is it’s almost impossible to predict. But with the FTSE 100 this week reaching an all-time high, it doesn’t surprise me to start hearing such chatter.
However, it’s important for me to always keep in mind that some market participants are constantly bearish. These are known as the ‘permabears’. That is, those investors who are always negative about the future direction of the markets.
If I listened to them, I’d be out of the market most of the time, and therefore miss out on most of the gains. But their arguments can be very persuasive. Humans seem wired to respond to negative rather than positive news.
Their arguments often sound smarter than bullish long-term investors, who can sometimes seem to be investing with blind faith.
But as the old saying goes, “Even a stopped clock is right twice a day‘”. So I generally don’t listen to the negative predictions of the permabears. Instead, I stay invested, remain optimistic, but also prepare myself for the worst.
Keeping some powder dry
When I first started investing, I wanted to buy shares as quickly as possible. That’s quite common and entirely understandable. After all, I’m not going to get that average 8% return by leaving cash sitting in my Stocks and Shares ISA.
However, as the years have gone by, I’ve moved to having cash on hand in my ISA ready to be deployed if the market crashes. I’m not actually hoping for a crash, of course. But if one happens, my cash pile will give me the chance to take advantage whenever high-quality stocks go on sale. History teaches me that the market has a habit of going back up.