Stock market crashes can cause a lot of pain when they do occasionally occur. When a crash happens, there's widespread and indiscriminate selling by fearful investors.
While living through a bear market is unsettling, it can also often be the time of the cheapest share prices. Hence, there are both positives and negatives to buying today or waiting for a stock market crash, so let's consider both strategies.
Wait for a stock market crash
When we look back at previous bear markets like the GFC, the 2020 COVID-19 crash or the inflation worries of 2022 on a chart, there were significant declines of around 30% for many ASX shares, and some dropped more than 50%.
The Wesfarmers Ltd (ASX: WES) share price chart below demonstrates the historical volatility share markets can see. Wesfarmers is the owner of Kmart, Bunnings and several other Aussie businesses.
When we buy shares at a lower price, it means buying them at a lower price/earnings (P/E) ratio and with a higher dividend yield.
The lower the price we can invest at, the bigger the margin of safety we can give ourselves. Buying during a crash can also unlock significant returns if/when that ASX share recovers.
For example, if a business had a $10 share price and dropped 50%, it would fall to a $5 share price. If someone invested at $5 and the share price recovers to $10, that would be a return of 100%.
Sitting on cash, earning interest and investing during a market crash sounds excellent on paper.
However, we don't have crystal balls—waiting for the bottom of a market crash carries a lot of execution risk. Investors may hesitate and miss the bottom of the crash by investing too late or we could invest too early, missing out on the best prices. There is also a danger of investing in a very beaten-up business that ends up going bust, resulting in a 100% loss.
Invest today
If someone has an investment plan and regularly deploys money into an exchange-traded fund (ETF), like Vanguard MSCI Index International Shares ETF (ASX: VGS), I think the most effective strategy would be to keep investing regularly and ignore what the market is doing.
The ASX share market and global stock market have delivered an average annual return of around 10% over the ultra-long term. That return has been achieved despite the crashes, recessions, politicians, wars, pandemics, and every other negative.
Businesses want to keep growing profits, and this can drive their underlying value higher, even if there is some volatility along the way.
I'm not suggesting we should buy any share at any price. But over the months and years, notable events alter the valuations of different companies and industries. And sometimes, a bargain can be found.
If a stock market crash occurs, I'd want to invest as much as possible to take advantage of those lower prices. But, I'm not waiting for a bear market. I regularly invest in the best ASX share opportunities for my portfolio.
So, for most people, I think the right strategy is to invest sooner rather than wait for an eventual crash.
