With the number of coronavirus cases on the way back up, tighter restrictions being considered, and the FTSE 100 losing positive momentum, I can’t be the only UK investor contemplating the possibility of another stock market crash before the end of 2020.
With no vaccine in sight, there’s certainly no shortage of catalysts. The return of students to university campuses (despite ongoing restrictions on teaching) is one example. Concern surrounding the effectiveness of the ‘rule of 6’ is another. Now factor in temperatures dropping and people spending more time indoors. Oh, and did I mention Brexit was back on the political menu?
Stock market crash ahead?
But it’s not only events at home that are causing people to worry. The recent sell-off of tech titans such as Apple and Amazon in the US suggests that even the most coveted businesses may have peaked in valuation for now.
Considering how far these stocks have bounced since mid-March, it’s understandable that investors have started banking profits. A victory for Democrat Joe Biden in the forthcoming election and the possibility of increased regulation and/or taxation of some of the biggest companies in the world could hit sentiment hard.
If all this makes for pretty grim reading, don’t despair. I actually think there are only two moves Foolish investors need to make in the event of a second market crash in 2020.
Exactly what you buy naturally depends on what sort of investor you are. If you have limited time and/or energy to get down and dirty with individual shares, a selection of funds is the way to go. These can be passive (effectively managed by a computer) or active (managed by a professional investor). Personally, I like a combination of the two. That said, you should always check a fund manager’s track record for evidence that they have the ability to outperform the market.
Of course, buying individual stocks can be a lot more financially rewarding if you can accept the risks involved. But as long as you pick great companies trading cheaply after the March market crash (relative to their average valuations over a few years), there’s a good chance you’ll beat the return you might get from holding a basket of funds.
The second move is the hardest of the two. It’s even tougher if markets continue to fall. Doing nothing is tricky for us goal-obsessed humans. We’re wired to believe that the amount of success we achieve correlates with the amount of effort we put in. We’re also attracted to the idea of timing the markets perfectly, even though this is pretty much impossible to do consistently.
But strange as it sounds, you stand a better chance of getting rich from the stock market by doing as little as possible. In practice, this means not checking your portfolio too often. It also means limiting your news consumption so you’re less likely to buy or sell on an impulse and incur broker commissions.
If you simply can’t keep a distance from the markets, be productive with your time. Build a watchlist of quality shares you’d be willing to buy if funds allowed and their prices keep dropping. If, and when, panicked traders begin selling indiscriminately, you can be there to mop up the good stuff.
Stock market crash 2.0? Bring it on…