Last week, I wrote about several reasons why the stock market is falling. It ranged from high inflation, to falling oil prices, political uncertainty and a gloomy outlook from the Bank of England. There’s a big difference between a tumble and a full-on stock market crash though. I’m not convinced we’re on the edge of a crash, but then again it’s impossible to accurately predict. So here’s my action plan that I’ve got ready to implement if we start to see things heading south.
Building up and deploying cash reserves
Even though I’m not changing my overall investment strategy at the moment, I’m thinking about reducing the amount I invest slightly in order to build up a bigger cash cushion for the second half of the year. This helps me in two ways.
Firstly, it allows me to reduce my new exposure to the stock market at a time when it’s more uncertain on direction. So if a crash does materialise, I’m not as exposed as I would be if I kept investing 100% of my free cash each month.
Secondly, it give me more ammunition to deploy during the crash. During the last crash at the start of 2020, some FTSE 100 giants traded down to very cheap levels. For example, Lloyds Banking Group shares halved in value to 30p in the space of a month from February to March 2020. The share price is currently at 41p. So having funds available to take advantage of these moves will help me in the long run.
Another point relating to this is that using my cash reserves can lower my average buying price for my existing stocks. As well as buying new stocks at good levels, I can top up on shares that I already own. If I have £500 invested in a stock at 100p and the share price falls to 80p during a crash, investing another £500 at 80p will mean my break-even price is now 90p.
Investing wisely now for a crash
My fourth and fifth points relate to the types of stocks that I want to target right now. Even with just a small amount of cash, I want to buy dividend stocks. During periods when the shares I hold are in the red, I clearly don’t want to sell. This ties up my capital though, so receiving passive income over this period is a real benefit.
Even right now I can find FTSE 100 options with dividend yields in the 7%-11% bucket. So with a £1,000 investment in a stock yielding 10%, I could be set to receive £100 in the next year, even if the share price falls during the time I hold it. As a note of caution, future dividend income isn’t guaranteed.
Another area of stocks I want to buy going into a recession is defensive consumer staples. Essential goods perform better than luxury items during a downturn. This makes sense when I think about it. If I’m tight on cash, I’ll obviously spend it on food and utilities rather than new golf clubs and handbags (sorry Mrs Smith). Some good examples I’m eyeing up are Coca-Cola HBC and National Grid.
