Nobody knows when the next stock market crash might happen.
But it will happen at some point. With rising interest rates, high inflation, and tightening consumer spending, I think the economic outlook looks gloomy.
Here are five ways I am preparing for a stock market crash right now.
1. Building a shopping list
There are some companies I would happily own if only I could buy them at what I think are attractive prices.
Businesses like Intuitive Surgical and Judges Scientific appeal to me – but their current share prices do not.
A stock market crash might offer me some bargain hunting opportunities, even for quality companies.
But the window of opportunity could be short. That is why I am spending time now updating my wish list of bargain buys.
2. Focussing on the long term
A crash can throw up bargains, but it could also wipe a lot of value off shares I already own. That can be psychologically difficult to process.
That helps explain why I am buying and holding shares focussed on the long term.
I try to buy shares if I think their current share price is markedly lower than their long-term value. That way, I should feel more comfortable even if I see the value of some of my holdings tumble in a stock market crash.
As an investor rather than a speculator, I do not worry about short-term share price fluctuations if I think the underlying investment case for a company remains strong.
3. Assessing my portfolio
In general I buy to hold.
However, what happens if a share I own shoots up in price to the point where I think it is overvalued? Sadly that is not a problem I have had much lately! But it does happen sometimes.
In such situations, I may sell my shares and take the profit. Weeding very overvalued shares out of my portfolio from time to time means I can bank the profit before they potentially tumble in value during a stock market crash.
4. Staying diversified
I see diversification as an important risk management tool for any investor.
Whenever the next stock market crash comes, I expect that some sectors will be hit worse than others. Whether it is banks or airlines, each of the past few crashes has tended to hit some types of business worse than others.
By making sure my portfolio remains diversified not just across companies but also between different business sectors, hopefully I can manage my overall risk when the next downturn arrives.
5. Learning and researching
Typically a stock market crash can throw up some great opportunities. I expect the next one will be no exception.
So I am spending time now to learn more about the stock market, valuations, and coming business trends. Hopefully that will mean I will be better prepared to act decisively and profitably when the storm comes.
As an investor, knowledge is power.
