Every investor knows that the name of the game is to buy TSX stocks low and sell high — which makes market crashes the perfect opportunity for long-term investors to buy stocks.
Stocks are rarely as cheap as they are when the market is crashing. It can be difficult, however, to buy at a time when everyone else is selling, especially when it seems like the drop in share prices may never stop.
But for investors with a long-term mindset who are confident in the outlook of their target stocks, you can have the confidence to buy and hold for the long term.
Buying almost any stock in a market crash will make you money. However, the best stocks can grow your investment significantly over the ensuing recovery period.
Here’s how you can prepare to turn $50,000 into $1 million starting at the next market crash.
Know which stocks you want to buy in a market crash
Investors should be continuously researching TSX stocks to get an idea of the companies you want to build up your portfolio and buy during market crashes.
It’s important to research several stocks and try to understand the differences in each. After all, if you only research a few businesses, how can you claim with any accuracy that they are the best on the market without fully researching a large number of stocks?
You may find that some high-quality TSX stocks are above your price range. It’s important to keep these stocks on a watch list and monitor their performance. This way, when the market does crash, you can be ready to take advantage as they trade at dirt-cheap prices.
Use compound interest to your advantage
Once the market actually does crash and you put your money to work, the real growth begins. Long-term investors can use compound interest to help their portfolio snowball.
An investor who can earn a compound average annual return of 10% would see their $50,000 turn into $1 million in just over 30 years.
However, if you could manage to save just $6,000 a year ($500 a month), that compound interest would see you hit a $1 million portfolio eight years earlier. And by the time you’ve been investing and saving for 30 years, instead of $1 million, your portfolio would be worth more than double.
Such is the power of compound interest. However, it only works if you buy the best long-term TSX stocks at the lowest possible prices, usually in a market crash.
One of the top TSX stocks to buy in the next market crash
There’s a very strong chance we could see another bear market this year. If that’s the case, I would advise all investors to consider taking a position in Canadian National Railway Co (TSX:CNR)(NYSE:CNI).
Canadian National has long been one of the best long-term stocks on the TSX. Railroads are a staple of the economy and have been for decades. They are an extremely low-cost method of shipping, giving them a huge competitive advantage.
During the last market crash earlier this year, CNR stock fell by nearly 25% before it started to recover. This would have been a significant opportunity for investors to gain exposure.
Not only is CNR a highly reliable stock with a defensive business, but the company is also a great growth business. It’s continuously reinvesting its profits in new growth and pays out just 30% of its earnings.
This keeps the dividend stable, allows Canadian National to continue to increase the payouts, and keeps adequate cash for growth projects, which is why it’s such an elite stock.
If you had researched CNR in early February, you might have thought the company looks attractive, but the stock was trading pretty high. However, soon after, when the stock crashed, you could have gotten exposure well under its fair value and already made a hefty return in the ensuing three months.
If you want to turn your savings into a $1 million portfolio, your best bet is to buy top TSX stocks during the next market crash.
So make sure to do your research ahead of time and know your target stocks. They may not stay cheap for long.