Lately, it’s been hard to find many analysts who are optimistic about the health of the market. Concerns over slowing global growth and the US/China trade ding-dong continue to weigh on minds. Oh, and that Brexit thing is dragging on a bit, isn’t it?
Since it can take a while before the full impact of economic uncertainty filters down into the stock market, I’m beginning to suspect 2020 could turn out to be another tricky one for investors. Ultimately, we can’t predict but we can prepare. Here, then, are four suggestions what you can do.
1. Keep some cash handy
To survive a downturn relatively unscathed, it makes sense to think not only about tackling any lingering, high-interest debt but also about what costs you have coming up in the near-term.
Do you have a would-be house deposit currently tied up in investments and intend to buy a property in the next year? If so, it may be prudent to move this money into cash to ensure it doesn’t lose value when you most need it. Do you have sufficient savings to cushion the blow of a period of temporary (but nevertheless unexpected) unemployment? If not, start building an emergency fund for if/when the bad times hit.
2. Get diversified
If you haven’t checked how diversified your portfolio is, do so soon. It’s remarkably easy to forget the importance of spreading your wealth around different assets, particularly following the sustained period of share price appreciation we’ve experienced since 2009.
Naturally, what you decide to do with your own investment portfolio will depend on your age, financial goals, and risk tolerance. As a rough rule of thumb, however, those nearing retirement should consider dialing down (but most certainly not eliminating!) their exposure to equities. Younger investors arguably have less to worry about, but it’s still worth asking whether companies held are sufficiently resilient, particularly if they already have shaky balance sheets, or operate in cyclical sectors.
3. Understand market cycles
Bear markets are part and parcel of investing. You can’t avoid them and you’ll never know exactly how you’ll respond until you’ve experienced one. As the great sage Mike Tyson once said: “Everybody has a plan until they get punched in the mouth.“
Notwithstanding this, you can, at least, educate yourself about these things before they happen, if only to gain an appreciation of just how common they are and how long they tend to last for.
According to a study by Yardeni Research, the 36 corrections and bear markets in the US since 1950 have lasted for an average of just 196 days — worth remembering before you aim to push that ‘sell’ button. For more on this, I heartily recommend the writings of investing legend Howard Marks.
4. Buy the dips
As we never tire of saying, private investors should regard market downturns as an opportunity to acquire great businesses at far more reasonable prices. They are, in short, a chance to accumulate.
This might sound easy, but it’s not. If you’re concerned about the market falling further after purchasing a stock or fund, you may wish to drip feed your money rather than all at once. No one manages to buy at the bottom consistently but, assuming the investment case is solid, averaging-in to a position makes more sense than waiting for a price that may never come.