We’ve managed to survive pretty much all of 2022 without a stock market crash. There have been times this year when things have looked a bit wobbly! Yet all of the dips in the market have proved to be just that, dips.
A good amount of the concerns from this year will spill over to 2023. This means there’s a fair chance that just one catalyst might cause a crash next year. Even if that does happen, here’s how I’d take advantage of it as an investor.
Possible reasons for a crash
There are several reasons why the market might take a dive next year. Inflation remains high in the UK and is continuing to climb higher. The latest figure of 11.1% show that even with the energy bill cap and other measures taken, prices are still moving up. If this keeps going in 2023, there will come a point where I think investors will really start to panic.
Another risk is with the actions of Russia. When the war in Ukraine started earlier in 2022, I thought this could trigger a market crash. Even though we did see the FTSE 100 dip, it ultimately rebounded. But if we see Russia launch an attack on NATO members, I feel this could really spook financial markets.
Finally, we might get a crash if data next year reveals a dire state for the UK economy. Latest forecasts show the UK is likely already in a recession now, but how bad could it get? If we see unemployment spike and wages stagnate, companies could see their share prices sink.
Not dwelling on the negative
All of the above points would have a terrible impact on a lot of people, myself included. I’m not wishing to make light of any situations that could cause the stock market to drop. However, I feel all of the above points would be able to be resolved over time. Some might take longer than others but, ultimately, I don’t think any would cause a lasting impact if I looked back in five or 10 years’ time.
As a result, I feel I could continue with my strategy of investing for long-term gains. Naturally, the best time to buy for such gains is when the market is low. Based on previous cases of sharp market downturns, some stocks get oversold due to investor fear. The business might still be sound, but investors simply run for the door.
In these cases, I have a golden opportunity to buy all kinds of shares for my portfolio. Stocks for growth, income, and value should all be trading at prices that represent a discount from where the share should be trading at under normal market conditions.
Prepared for a crash
In order to ready for this potential event, I want to build a cash buffer in coming months. This doesn’t mean I’m not investing at all until I see a crash. After all, if nothing materialises and the market rallies, I’ll miss out on all the profits. Rather, I’m just being more conservative in what I buy now and how much of my free cash I invest.
