Why are the grumblings about an impending market crash getting louder when the stock market is advancing? As of August 17, 2020, the TSX is 7.7% shy of its record-high 17,944.10 on February 20, 2020. Also, Canada’s main equities index is losing by only 2.4% year-to-date.
The doomsayers or pessimists can’t pinpoint exactly when the crash will occur. Investors generally hate market crashes, although others love them and are waiting on the sidelines to take advantage of the downturn. The following are the reasons why a market crash is sometimes a favourable event.
1. Build future wealth
A stock market crash might be the right time to make excellent purchases. Warren Buffett, for example, amassed his fortune during market selloffs. You can potentially boost your portfolio and build future wealth since many stocks are trading below the companies’ intrinsic or real value.
It’s like being in a bargain sale where you can buy prime items at a lower cost than you’ve seen for years. If you’ve wanted to buy a blue-chip stock, you have to chance to scoop it at a discount.
2. Accumulate more shares
For dividend and income investors, a stock market crash is an opportunity to acquire more shares of your core holding. If Royal Bank of Canada (TSX:RY)(NYSE:RY) is your top holding, you can increase your stake. The bank stock was trading at $109.21, then fell 29.75% to $76.71 at the height of the recent carnage in mid-March 2020.
In such an instance, you can buy more shares of the premier bank stock that pays a 4.45% dividend. Remember that payouts depend on the number of shares you hold. Thus, you can expect more significant earnings by loading up on RBC shares. You have an advantage because the largest bank in Canada is a dividend aristocrat.
RBC has a dividend track record of 150 years, and in all likelihood, the bank will keep its flawless record intact. The chances of a dividend raise are higher than the odds of a dividend cut. At its current yield and your $25,000 capital, your money will swell to $45,795 in ten years or $83,888 in 20 years.
3. Larger windfall in recovery
Historically, the stock market recovers after a crash. If you held your stocks and locked in your losses, you can recoup when the price appreciates later. Let’s look at RBC again. When the stock price sunk to a COVID-19 low of $76.71, bargain hunters took advantage of the steep drop. As of August 17, 2020, the share price is $97.19.
Had you bought into the downturn, your investment would have climbed by almost 27% due to the market rally. RBC was down, yet was able to recover handily when the general market rebounded from the pandemic shock.
Best market scenario
A bull market is still the best scenario because the stock market is rising, and economic conditions are sound. When the market goes haywire, stock values will drop, and investors will lose confidence. Thus, no one should wish for a market crash. But when it comes, be ready to make the smart moves to defeat the bear and win.
Speaking of reasons to love market crashes...
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.