A stock market crash could happen at any moment. That’s no great insight, markets regularly crash, often when we least expect them to do so. There have been loads in my lifetime, and I expect to see many more.
Yet things are particularly tense today. Investors have been rattled by the war in Ukraine, deteriorating Chinese relations, the energy shock, rocketing inflation and the fastest interest rate hike cycle in 30 years.
Investing in troubled times
As if that wasn’t enough, we now have the spectre of another banking crisis. No wonder the FTSE 100 has plunged 500 points since hitting its all-time high of 8,000 last month.
I don’t know when the crash will come, how bad it will be, or how long it will last. We might not get a crash at all. The banking crisis may be contained, inflation could ease, interest rates might start falling by year end. Investors might soon be talking up the next bull run, but it’s wise to prepare for the worst, just in case.
Here’s what I wouldn’t do in a crash. Sell shares. That would only turn my paper losses into real ones. It hurts when the value of my portfolio falls, but I’d comfort myself in three ways. First, by reminding myself that a crash is only temporary but I’m investing for life.
Second, by remembering that my reinvested dividends will pick up more stock at lower price, turning volatility to my advantage.
Finally, I can turn the crash to my advantage by picking up some of my favourite stocks at their new, lower valuations.
I’m now working through the FTSE 100 and drawing up a hit list of top stocks to buy if shares do crash. My focus would be on companies with loyal customers, steady revenues, strong balance sheets and sustainable cash flows to maintain their dividends until the good times return.
FTSE 100 banking stocks look like a great place to start. They’ve sold off lately, given contagion fears, yet so far no actual problems have emerged in the UK.
I’d buy these shares in a dip
Some fear Barclays may be at risk due to its greater US exposure, and its shares are down 25% since 2 February. It’s now dirt cheap, trading at just 4.65 times earnings. There’s risk involved, but a buying opportunity for the brave.
I’d also target some of the FTSE 100’s best dividend stocks, including GSK, Legal & General Group, M&G and Taylor Wimpey.
In a full-blown crash, even solid, defensive stocks like Diageo, Experian or Unilever could take a big hit. I’d love to buy them at a 20% discount.
Naturally, there’s no guarantee that my FTSE 100 stock picks will recover quickly from a crash. Many could cut their dividends. But I’d spread my risk across more than a dozen stocks, and hold them for a minimum of 10 to 15 years.
That brings me to the number one action I’m taking to prepare for a possible stock market crash. Building up my pool of cash. If my favourite shares start falling and I don’t have the money to buy them, the crash will go to waste and I don’t want that.
