Will the stock market crash again over the summer? I think it’s a serious risk. The coronavirus pandemic is still with us and, as yet, there’s no sign of a vaccine. Lockdown is being reinstated in some parts of the world, including some major US states.
At this stage, I think we need to hope for the best and prepare for the worst. Today, I’d like to explain how I’m preparing for a possible crash — and why I’m still buying shares.
Two things I’m doing
The truth is that no one knows what will happen to the stock market over the next six months. What I do know is that I want to own shares in successful companies. I don’t mind a bit of short-term uncertainty if it means I can benefit from longer-term gains.
To achieve this goal, I have a two-part plan. The first part of my strategy is to have a list of good quality companies I’d like to buy at cheaper prices. Defensive business, such as Unilever and home services company Homeserve, might fall onto this list. The criteria I look for include low levels of debt and a history of consistent profits.
The second thing I’m doing is continuing to buy shares each month. The reason for this is that if you sit on cash waiting for the perfect moment, you’re likely to miss out. Timing the market is pretty much impossible. In my experience, you just have to stay invested and take advantage of opportunities as they arise.
Shifting your portfolio into cash might feel safe, but you’re missing out potential share price gains and dividends. With interest rates so low, I don’t think this makes sense.
I don’t really care if the stock market crashes!
I tend to hold shares for many years. As a general rule, I only sell if I think that something fundamental has changed, or gone wrong, with the business. This means I’m not (too) bothered when the value of my shares drops during a market crash. Over time, I expect them to recover, unless I’ve invested in bad businesses.
I find this approach is a big help when the stock market crashes. It means that all I have to do when the market crashes is look out for possible buying opportunities. I didn’t sell anything in March, for example, but I did buy as much as I could afford to.
Will the UK economy bounce back?
We’ve seen an initial burst of pent-up demand as UK businesses have reopened. But the outlook is very uncertain. Big retailers, such as Boots, Halfords and John Lewis have already announced thousands of job cuts. So have businesses linked to the airline sector, including easyJet and Rolls Royce.
My feeling is that the worst may still be to come. The government has done a lot to support businesses through lockdown, but these measures are expected to taper over the next few months.
As this happens, companies will be forced to adapt their operations to reflect real demand. I suspect that economic activity will remain lower than it was before the pandemic struck. This could lead to a longer period of weak trading for many companies. But the best businesses should still do well.
