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Is a stock market crash good or bad for new investors?

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The thought of a stock market crash throws up all sorts of associations. From photos of traders looking stressed to dramatic graphs of plunging stock prices, a crash can seem like bad news.

But actually, for established investors as well as brand new ones, such an occasion can provide some promising opportunities. Here’s how.

What is a stock market crash?

Imagine that in your garden you have 10 apple trees. Six of them produce a fifth less apples this year than they did in the previous harvest. But four of the trees actually give you 20% more apples than before.

Is this a good or bad harvest?

Overall, the harvest is less than last year. But some individual trees have actually yielded a bumper crop.

I think of a stock market crash like that. The term typically means that the overall stock market has lost 20% of its value in a short period of time. The loss can be worse than that. Between 1929 and 1932, for example, the Dow Jones Industrial Average of leading US shares shed 89% of its value!

But that is an average. Not all shares do as badly during a market crash – and some may actually go up in value. Rather than owning an orchard, what if I could just choose the individual apple trees or shares I expect to do well?

Market timing and picking winners

Of course, while that may make sense in theory, can I manage it in practice?

Trying to time the market is very difficult, if not impossible – I do not bother to try. Instead, I focus on finding what I think are great businesses with enduring prospects.

I can think of some such businesses off the top of my head, from Guinness owner Diageo to Apple. The problem for me as an investor is that I am far from the only one trying to identify such companies. That can often mean that their share prices get pushed up to a level where they are not attractive to me. Even a great company can make a lousy investment if I pay too much for it.

A stock market crash might offer me the opportunity to buy the shares I want at a price I find attractive. If I was a new investor, I would see that as a great opportunity. I would not have made paper losses on an existing portfolio – and could hunt for bargains even among the ranks of quality companies.

The psychology of a stock market crash

As an investor with a existing portfolio, I also think that approach makes sense for me.

But seeing steep losses on one’s portfolio during a crash can be psychologically unsettling. If I do not sell, though, I have not actually lost money. If I bought shares in great companies to start with, I often ignore short-term price movements. Unless the investment case for a business has changed, I would hope its share price would reflect its quality in the long term even if there are bumps along the way.

That is why, just as I would if I was a new investor, I see a stock market crash as a buying opportunity for my portfolio.

The post Is a stock market crash good or bad for new investors? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple and Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.