Volatility has increased on the FTSE 100 over the past couple of weeks. Concern is resurfacing about the strength of the UK economy. This ranges from the wobbly property market to the prospect of interest rates increasing further. If these factors triggered a stock market crash, here are the actions that I’d take from a reactionary point of view.
Pick the areas of focus
Different sectors will react differently depending on the root cause of the problem. My aim would be to look at the hardest hit areas and make a judgement call on if it has been oversold in the short term. Often during a crash, fear means many share prices fall below the long-term fair value. This can represent a good opportunity for me to buy.
Yet I can only make this call as the crash is unfolding. If there’s reason to believe that companies in the sector could genuinely go bust, it’s not worth the risk.
Load up on dividend stocks
With the whole market falling, it can act to push up the dividend yield on different stocks. The yield is calculated from using the dividend per share and the share price. So a lower share price and the same dividend per share will increase the yield.
On this basis, I’ll look for shares that have been able to pay out sustainable dividends over past periods of stress. This includes periods like the financial crisis in 2008/09 and the Covid-19 pandemic in 2020/21. This gives me confidence that whatever the cause of the crash, income could likely still get paid.
Average-down on existing holdings
The probability is high that whatever stocks I’m already holding at the time of a crash will be worth less during the turmoil. In order for my future self to thank me, I’d consider investing more in my existing stocks to average down my buying price.
For example, I might have bought a stock at 100p that falls down to 80p. If I add the same amount of funds again, my average price gets reduced from 100p to 90p.
Still maintain some dry powder
Despite wanting to pick up some stocks on the cheap, I’ll always keep some money left in the bank. I’m not talking about essential money needed for bills. But with my spare cash, I always want to leave some on hand.
This is because no one knows exactly how low the market could fall. If I invest all in one go, I’m very exposed to the market falling another X% after I’ve bought. Therefore, keeping some cash to one side can help me to buy in chunks over a period of time and be more disciplined with my purchases.
Don’t panic Captain Mainwaring!
My final action doesn’t specifically relate to a particular stock. Rather, it’s to do with my mindset. If the market does take a sharp nose dive, I need to stay calm. If I let emotions get the better of me, I’ll end up making some dumb choices.
