Investors are concerned another stock market crash is coming. The second wave of coronavirus infections is possibly on the way, and increased lockdown measures are being considered. This would very likely hurt the markets, and they’re getting jittery. The FTSE 100 and other major indexes have declined today, adding to the drops seen last week.
But what should an investor do if worried about those fears of a bear market becoming a reality? In times like these, I like to take advice from investors who’ve seen it all before and have long track records of success.
Stock markets crash
Renowned investor Peter Lynch has accepted that dealing with bear markets is part and parcel of investing, and so should we. At some point, every investor will see the value of their portfolios dip. So, what’s an investor to do about this?
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready… I’ve been fully invested at the start of all the major declines and will be fully invested in the next one. I am not a market predictor, that’s for sure”
Peter Lynch
Mr Lynch acknowledges that markets are difficult to time. In fact, many famed investors take the view that time in the market is more important than trying to time the market. Unless you have an unusual talent, you’ll probably do better by investing regularly. That will mean buying when stocks are up as well as when they’re down. Having a long time horizon is also essential. Stock markets crash, but they also go on bull runs, which tend to last longer. Investors should be able to keep their money invested for five to 10 years, which should be sufficient to recover from any crash… and then some.
Fundamentally good
Warren Buffett ignores what the market is going to do. Instead, he tries to buy (and often succeeds in doing so) stocks in great companies. You see, if a company is terrible, if it goes bust, then it doesn’t matter what the markets are doing, does it? On the other hand, stocks in great companies might decline during a bear market, but that makes them cheaper, and regular investing will take advantage of that.
“We don’t buy and sell stocks based on what other people think the stock market is going to do, but rather upon what we think the company is going to do.”
Warren Buffett
In the long run, stocks in great companies should trade higher than they do at the moment. That might be especially true in a bear market.
Diversification
Investors will make mistakes. John Templeton knows this, and so should you. Owning multiple stocks means that a portfolio won’t be wiped out because of a single, or perhaps multiple, mistakes.
“Diversification is a safety factor that is essential because we should be humble enough to admit we can be wrong.”
John Templeton
Every stock market crash is different. But in the last one, and perhaps the next, a portfolio of only travel and bank stocks would have performed particularly badly. I would therefore call a portfolio of multiple stocks in multiple different industries and sectors a truly diverse one.
