A lot of time and energy goes into predicting when the next stock market crash will happen.
The reality is, nobody knows when.
But what we do know is that there will be another crash, sooner or later.
So, rather than waste my time peering into a crystal ball, I prefer to take the practical steps now of preparing for a crash whenever it comes. After all, what we call a crash can also be seen as a sale – sometimes the sale of the century!
1. Understand how the stock market works
My first move is to learn more and more about how the stock market actually works.
That may sound obvious. But when share prices are stable or increasing, some people buy them without really bothering to understand how the market actually works. That means they are not investing but merely speculating.
When there is a stock market crash, I do not lose money just because of that. I lose money only once I sell shares for less than I paid for them (and even then I may not have lost money overall, if the share had paid me dividends while I owned it).
However, a crash could affect my investments nonetheless, even if I do not sell immediately. It could sink economic confidence, for example, hurting the prospects of companies in which I have invested. The more I can learn about how the stock market works, the better able I feel to prepare for a crash.
2. Design my portfolio
Buying and selling, buying and selling.
Doing that without a bigger plan – even if one holds the shares for a long time – can lead to a muddled portfolio.
For example, one share in my portfolio far outperforming others could turn an initially diversified ISA into one with concentrated risk.
So I try to ‘design my portfolio’. In other words, deciding things like how I want to diversify if, what weighting I might aim for between different types of companies, whether I want to keep an amount in cash and if so how much.
Doing that could help me from being caught unawares by a stock market crash.
3. Preparing a shopping list
Would I like to own shares in Judges Scientific (LSE: JDG)?
Absolutely!
It has what I think is a great business model. Judges buys up specialist manufacturers of equipment like precise measurement tools. Those are important to customers like laboratories, who are willing to pay for quality. By not overpaying, Judges is building up a very profitable collection of businesses. It can then add economies of scale those businesses could not achieve independently. Just this month it snapped up a Swiss optic fibre properties measurement specialist.
In fact the business model seems to attractively simple to me, one risk I see is a copycat firm pushing up the price of potential acquisition targets.
Revenues grew 15% last year even ignoring new acquisitions. The dividend was more than double what it had been just four years before.
But Judges’ valuation is too high for my tastes.
I am maintaining a list of shares like it I would like to buy if a stock market crash suddenly made them look like good value.
