It has been a nervous time for global stock markets over the past few days, following the collapse of a large US bank. On this side of the pond, the benchmark FTSE 100 index of leading shares has fallen 8% in the past few weeks.
That puts us close to a stock market correction, which is a loss of 10% in value over a short period of time. If things keep going this way, we might yet be in the territory of a stock market crash – a 20% fall in value across a short period of time.
Is it likely to happen – and how ought I to prepare?
Could the FTSE 100 crash?
I have my doubts about the short-term likelihood of a FTSE 100 crash. The index has risen less than 3% in the past five years. That does not sound like the run-up to a frothy price.
Indeed, the valuation of a lot of UK blue-chip shares already looks fairly attractive. The market is not obviously overpriced, unless the economic outlook shifts dramatically.
However, markets do not always behave rationally. Although I do not think the FTSE 100 looks overvalued, nervous investors pulling money from markets could still lead it to fall.
For that to turn into a full-blown crash, I think there would probably need to be some sort of trigger event, like a run on a European bank or significant downgrading in economic forecasts. Such events could happen, perhaps unexpectedly. But for now, I see no obvious and immediate trigger for a FTSE 100 crash.
Hope for the best
However, I am still preparing for the worst.
After all, clearly there will be another stock market crash at some point in future. What we do not know is when that will turn out to be. It could be tomorrow, but it might not happen for decades to come.
What does it mean to say that I am preparing for the worst?
Basically I am getting ready for a FTSE 100 crash, no matter when it comes. What a lot of people misunderstand about a crash is that it is not necessarily a bad thing for investors. In fact, it can be a gift. A stock market crash offers me the chance to buy stakes in some of the world’s best businesses, at a lower price than they cost before (and hopefully less than they will prove to be worth in the future)!
But that window of opportunity may prove to be short-lived. That is why I am getting ready now, by updating my ‘shopping list’ of shares I would like to own if they become available at an attractive enough price.
Hunting for bargains
I have already been using recent price weakness to buy some FTSE 100 shares this year, such as JD Sports and Persimmon.
But there are other shares in the prestigious index I am eyeing in case they become available at a lower price, from Diageo to Bunzl.
I do not know when the FTSE 100 will next crash. But I am getting ready right now!
