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The biggest thing that drives people out of the market is the possibility of it crashing. But while that concern is understandable, it’s not as bad as it might seem.
As long as investors are well prepared for the possibility that prices may fall, there is no need to worry. So what should you do to make sure you give yourself the best chance?
Investment benefits
10 years ago, the FTSE 100 returned an average of 8.5% per year. That’s much better than saving money and that makes a big difference in the long run.
However, with the stock market, things don’t just go up every year. Share prices fell in 2018 and 2020, meaning that investments in January of those years were worth less in December.
| A year | FTSE 100 Rate of Return |
|---|---|
| 2018 | -8.7% |
| 2019 | 17.3% |
| 2020 | -11.5% |
| 2021 | 18.4% |
| 2022 | 4.4% |
| 2023 | 7.1% |
| 2024 | 9.7% |
| 2025 | 22.8% |
Importantly though, even investments made in bad years have done well over time. A good example is 2020, when the FTSE 100 fell by 11.5% per year.
A £10,000 investment in the FTSE 100 tracker fund at the start of 2020 was worth around £1.5780 at the start of Friday (2 January), before the index hit 10,000 points. That’s an average annual return of 7.9% – more than cash offers.
Dealing with crashes
The point here is clear – even investing in a bad year has the potential to do well in the long run. There are no guarantees, but this is what investors need to remember.
Strictly speaking, prices falling 11.5% is not a crash. But the FTSE 100 fell 23% at the start of the pandemic (which is the danger zone) before recovering slowly.
The key to weathering a crash is being able to stay invested even when prices drop. There is a way to lose money in the stock market – by selling when prices are low.
Anyone who invested at the beginning of 2020 and sold at the end of it lost money. But those who didn’t manage that return is about 8% per year. Those who shop at the lowest prices are likely to make more!
How to stay invested
I think the easiest way to stay invested is to focus on buying stocks in high quality companies. One example from my portfolio JD Wetherspoon (LSE:JDW) – a FTSE 250 a pub chain.
I’ve held stocks for a few years and it’s been a rough ride. High labor costs have hit me hard, but I’ve never thought about selling.
The main reason is that the company has continuously increased its sales during that time. And its focus on value for customers means I think there’s a good chance it can continue.
JD Wetherspoon has been an outstanding worker in a difficult industry. But when the stock tanked, focusing on the business has helped me avoid selling at a loss.
Buying shares
The stock market may reverse in 2026. But even investments made just before a big drop in stock prices can perform very well, especially in high-quality companies.
JD Wetherspoon’s scale gives us a cost advantage which we use to offer lower prices than our competitors. That’s why it’s a stock that I think anyone starting to invest should look at.
