The Bank of England is expected to increase interest rates to their highest levels in 13 years. I think this means there’s an increased chance of a stock market crash this year.
Rising interest rates are generally bad news for people who want stock prices to go up. Even if there’s no crash this year, I’m anticipating increased market volatility as a result of the increase in interest rates.
A stock market crash in 2022 doesn’t have to be a problem for me, as long as I don’t have to sell my investments when the market is low. If I keep my investments, I think things will work out over time. But if I sell them while prices are low, then what happens in the future can’t benefit me.
With that in mind, here’s my plan for coping with the turbulence I’m anticipating in the stock market.
Holding back cash
In a stock market crash, the last thing I want to do is to sell my investments. To make sure I’m not forced into doing this, I’m being careful to keep enough money on the sidelines so that I’m able to meet any expenses without having to sell my investments.
Importantly, I’m not holding back cash to try and invest it when the markets are at their lowest. Warren Buffett has no idea how to do that and it’s beyond me, too. But keeping money aside so that I don’t have to sell my investments when share prices are low is an important part of my plan.
Focus on the end
Another part of my plan involves keeping my focus on my investing ambitions. My aim with investing is to grow my wealth over time for my retirement, which is still about 30 years away.
Take my investment in Legal & General as an example. If the shares reach 500p over the next three decades and I collect dividends along the way, then I’ll have done fine. It won’t matter whether the share price in 2022 was 300p, 200p, or 150p.
Focusing on this helps me avoid selling my shares in a stock market crash because it helps me avoid being distracted by short-term fluctuations in share prices.
Concentrate on the business
Lastly, in order to prevent myself from being drawn into selling my investments in a stock market crash, I’m trying to focus on the underlying business, rather than the share price.
If interest rates go higher, then I expect the price of Legal & General shares to go down. But that doesn’t mean that the company is doing any worse. And as long as the business keeps performing, I think I’ll do well with the stock over time.
As Buffett says, the market is there to serve me as an investor, not to inform me. A stock market crash doesn’t mean that the underlying businesses are in worse shape. Focusing on the businesses, rather than the share prices, should help me to navigate through a stock market crash, if we see one in 2022.
