Are we heading for a stock market crash? There’s no way to know for certain, but there are reasons to be worried, from an ongoing rout across global bond markets to wars in Ukraine and Israel. There’s credence to the argument that the future looks gloomy for equities.
However, the US big tech profit machine continues to deliver for now. In addition, FTSE 100 stocks such as Rolls-Royce and Marks & Spencer have performed exceptionally over the past year. Sitting on the side-lines in cash would have meant missing out on strong share price rallies on both sides of the Atlantic. And while inflation remains high, this presents a conundrum for investors.
As a long-term investor, I’m resigned to the fact that I’ll inevitably experience several crashes during my journey in pursuit of good returns. Whether the next one occurs in days, months, or years, it’s prudent always to be ready for a possible stock market crash.
Here are four steps investors could consider taking to prepare their portfolios today.
1. Keep informed
Each stock market crash has unique dynamics. It’s important for investors to stay alive to macroeconomic and geopolitical developments as well as company-specific news that could impact their shareholdings. After all, crashes present significant risks and opportunities.
For example, in the 2020 crash, airline stocks like IAG and easyJet plummeted amid strict travel restrictions and quarantines. They remain depressed from their pre-Covid highs today. However, Amazon shares soared, fuelled by a boom in e-commerce sales during successive lockdowns.
2. Identify opportunities
The lesson here is that, when searching for stocks to buy, investors should consider which companies might perform well in the current market climate, and which might underperform. For instance, one share that soared to a new all-time high recently is FTSE 100 defence giant BAE Systems.
Considering the rise in security concerns and defence spending across Western nations, this is unsurprising. But, whether the business can continue to generate stellar returns is open to question given the stock’s price-to-earnings (P/E) ratio of 17 is a little higher than the long-term average.
3. Manage risks
Historically, over long time periods, leading indexes like the FTSE 100 and S&P 500 have always recovered from stock market crashes to new highs. However, there’s no guarantee this will continue into the future.
Moreover, this hasn’t been true for many individual shares, hence portfolio diversification is an important consideration. Nonetheless, investors might be concerned by their overall exposure to the stock market, particularly if they have money invested that they could need in the near future.
Stocks are volatile assets and returns on cash are more attractive now due to recent interest rate rises. If investors fear they might sell their shares in a panic during a stock market crash, taking profits may not be a bad idea to help them sleep better at night.
4. Stay invested
That’s because my preferred investing strategy is to buy-and-hold quality investments for the long term. It’s the Foolish way — and it demands embracing stock market volatility.
When the next stock market crash arrives, I’ll hold my shares through thick and thin. But, I always keep a decent emergency fund in cash, away from the whims of Mr Market.
