Could I take advantage of the stock market crash to turn $20,000 into… pounds per half a million?

While I wouldn’t wish a stock market crash on anyone, savvy investors know a good opportunity when they see one. A way is being prepared to make the most of such an opportunity.

As the saying goes: failure to prepare is preparation to fail.

No one knows for sure when next failure will come, so it is very important to save some money. With enough cash, a savvy investor can acquire the right stock at the right time!

However, it is important to understand the psychology market collapse and they have a strategy to take advantage of lower prices. Exchange 20 thousand pounds to half a million pounds is not an easy task and involves some risk!

Here is a description of how I would like to do it.

Maximize my ISA potential

Twenty grand is quite a lot of money, so I would have to spend some time saving up to start with. This is also the perfect amount to fill Stocks and shares ISA with full annual allowance. Using an ISA would help reduce the capital gains tax I pay on my returns.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Smart investors know that a market crash is not a reflection of the long-term value of individual companies. Many solid companies experience temporary price drops simply due to market-wide panic. During a crash, established and financially sound companies often become available at a reduced price.

Therefore, it is important to identify which stocks have high intrinsic value but have been priced out by the broader market.

Identification of high-quality inventory

Consider stocks like British-American tobacco. It has delivered an annual return of 6% over the last 30 years. There have certainly been some ups and downs during this time, but overall we have found ourselves consistently gaining.

Currently, dividend rateis over 8%, but has averaged around 5% over the last few decades.

Assuming that these averages persist, the invested PLN 20,000 pounds will rise to almost £470,000 over 30 years, once the dividends are reinvested. Buying at a time of crisis would likely provide an equal amount greater profits.

You don’t like tobacco? Let’s consider Legal and general (LSE: LGEN), an established British insurer worth £13 billion. Since 2008, the company’s annual dividend has grown at an annual rate of 13.3%, from 4p per share to 20p.

However, it has significant long-term policy liabilities, which make it vulnerable to unfavorable market conditions that could impact its ability to generate returns on its reserves.

This may be one of the reasons for the price drop of 11% this year.

However, looking long term, the 30-year annual rate of return is also around 6%. The yield is currently 9.3%, but since 2014 it has averaged around 6.5%. With these averages of 20 thousand pounds could grow to half a million in just 27 years.

Looking back to the 2008 financial crisis, the company’s shares are down 75% this year. It’s like today’s price of 220p dropped to 55p. However, in the 10 years after the crash, the price increased year-over-year by almost 22% per year.

If this happens again, a £20,000 investment could grow to over £500,000 in less than 13 years!

However, I wouldn’t put everything into one bag. I would rather aim for similar average returns to diversifying my investments in the entire stock portfolio. This helps reduce your exposure to industry- or company-specific risks.