Investing in the stock market is one of the best ways to build wealth and help us retire early, along with growing our work earnings and spending less than we earn. The ASX stock market has a track record of long-term growth, but when you look at the chart below of the S&P/ASX 200 Index (ASX: XJO), you can see time periods of heavy volatility.
It's those significant declines that scare many people away from ever owning stocks. However, as the chart shows, a recovery has occurred each time as company earnings and investor confidence improved.
I think it's a good idea for investors to regularly put money into the (ASX) stock market. But, I'm heavily advocating for every investor to take full advantage of when crashes occur, if they can.
As Warren Buffett, one of the world's greatest investors, once said:
Be fearful when others are greedy and greedy when others are fearful.
If we buy ASX stocks during a crash, it can significantly bring forward the age at which we can retire or significantly increase how much we retire with. I'll show you how.
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Capital growth boost by investing during a stock market crash
Imagine a business had a share price of $45 in early 2020 and now trades at $92. That's a return of just over 100% in five years and eight months.
But, during the COVID-19 crash, investors could have bought shares of this company at around $33 and now it's a share price of $92 – that's a return of more than 170%.
That's a difference of more than 70% from the same business, just by buying at a better price.
The ASX stock I'm referring to is the owner of Bunnings and Kmart, Wesfarmers Ltd (ASX: WES).
This means with a $1,000 investment, someone would make more than $700 in additional share price growth alone by buying at that cheaper price.
With a $10,000 investment, it'd be more than $7,000 in additional gains over that time.
It's a similar story with most ASX shares – COVID-19 was a great time to invest, as was the inflation volatility in 2022 and 2023.
Buying during a stock market crash can boost our long-term portfolio returns significantly – extracting an additional percentage point or two of performance can deliver much more wealth.
If $10,000 grows at an average of 10% per annum – the long-term return of the share market – it becomes $67,275 after 20 years.
If it grew by 11% per annum, it would become $80,623 after 20 years.
If it grew by 12% per annum, it would become $96,463 after 20 years.
Dividend income boost
Not only can the capital growth get a big boost, but the passive income also gets a big boost too when we buy at a lower price.
If the business has a 5% dividend yield and then the share price falls 10%, the yield becomes 5.5% (if the dividend payout doesn't change in dollar terms).
A 20% share price fall would mean the dividend yield becomes 6%.
A 30% share price decline means the dividend yield is 6.5%.
With a $10,000 investment:
- A 5% dividend yield means $500 of annual passive income
- A 5.5% dividend yield unlocks $550 of passive income
- A 6% dividend yield creates $600 of passive income
- A 6.5% dividend yield translates into $650 of passive income
From the same business, an investor could gain an extra $150 of annual passive income just by investing during an ASX stock market crash.
