Worried about a stock market crash? Follow this one rule to protect yourself

With the situation escalating in Ukraine, investors may be fearing a stock market crash. Karl Talbot explains one rule they should keep in mind.

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Fears of a stock market crash are growing with the FTSE 100 falling more than 3% on Friday 4 March. The slump followed the news that Russia had attacked a Ukrainian nuclear power plant. This has understandably sparked fears of a wider catastrophe in the region.

So, with share prices tumbling, there’s one very important rule investors should keep in mind before panicking. Here’s the lowdown.


What’s happened to the FTSE 100 recently?

Fears of a stock market crash are growing, and it’s not difficult to see why.

On Friday 4 March, a combined total of £100 billion was wiped off the value of members of the FTSE 100. This tells us investors are clearly concerned that the ongoing war in Ukraine will escalate, particularly with the news that the Russian military had recently attacked Europe’s largest nuclear power plant. The act was described by Britain’s Foreign Secretary, Liz Truss, as “reckless”.

The latest slump in the value of the FTSE 100 means the UK’s largest share index is sitting below 7,000 points at the time of writing on the afternoon of 4 March. It’s the first time the FTSE 100 has sat below 7,000 points since October last year.

To put into context just how much the current war in Ukraine is concerning investors, it’s worth taking into account that the FTSE 100 has lost almost 500 points since the start of the week. That’s a fall of 6.6%.

For the FTSE 250, it’s a similar story. The UK’s second-biggest share index has seen its value plummet by 6.94% since Monday.

Will the stock market crash soon?

Following a turbulent week for the stock market, it’s likely investors will have seen the value of their portfolios plummet over the past few days.

While a fall in the region of 6% won’t meet most people’s definition of a ‘stock market crash’, some investors may fear bigger drops in the coming days.

While it’s extremely difficult to predict whether or not the stock market will crash in the near future, history tells us that unforeseen events, such as war, can cause share prices to plummet. When shares prices do slump, this can be followed by even greater losses following the ‘domino effect’ caused by panic selling. In other words, when investors begin to offload stocks, other investors are often tempted to follow suit to avoid prices falling further. 

Of course, even prior to the events in Ukraine, fears of a 2022 stock market crash were very much in the air. That’s because inflation in the UK is well above the government’s annual 2% target. According to the latest ONS figures, the inflation rate currently sits at 5.5%.

As a result, the Bank of England is expected to hike its base rate again very soon. If and when this happens, borrowing costs will rise, which could negatively impact share prices.


How can you protect your wealth from a stock market crash?

Amid the current economic uncertainty, it’s understandable to think the chances of a stock market crash have increased. While the stock market is very difficult to predict, there is one rule you can follow to protect yourself.

Put simply, understanding your personal risk tolerance is arguably the most important factor you should take into account when investing. For example, if stock market worries are keeping you awake at night, your portfolio may exceed your appetite for risk.

To put it another way, while a portfolio consisting of a high number of equities may deliver hefty returns during a bull market, it can be a different story during times of uncertainty. That’s because a portfolio with a large allocation of equities is likely to experience a high level of volatility. This can be particularly concerning for risk-averse investors or those who plan to access their wealth in the near future.

In contrast, if you have a long-term horizon in mind, you may consider volatile share price movements as ‘part and parcel’ of investing. Because of your long-term horizon, you’ll know that the stock market is likely to rise and fall over the next few years – even decades – so recent slumps shouldn’t overly concern you.

To understand your personal appetite for risk, you may wish to take The Motley Fool’s risk tolerance quiz.

Are you looking to invest? Despite recent falls, investing in the stock market can still help grow your wealth, particularly over the long term. So, if you want to invest, take a look at the top-rated share dealing accounts.

If you’re new to investing, you can study the investing basics to get you started.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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