The chances of a stock market crash have surely risen in recent weeks. War in the Middle East, soaring oil, inflation on the horizon, and little chance of interest rate cuts any time soon… these are not good signs.
Should I dump everything and sit on cash for a few months? Nope, not a chance. And I’ll tell you something else I’m not going to do — panic! We need to keep things in perspective.
Despite what’s already happened over Iran, the FTSE 100 has only fallen around 4.5% since its recent peak. And ‘Footsie only down a little bit from all-time high’ really isn’t the kind of headline to strike fear in investors’ hearts, is it?
I mean, a crash is technically a 20% fall. And we’re not remotely close to that. In fact, I’d say the modest decline underscores the resilience of the UK stock market.
US optimism
What about over in the US? Well, Goldman Sachs has just predicted corporate earnings could push the S&P 500 to around 7,600 by the end of 2026. They didn’t mention the war.
I think a stock market crash any time soon is unlikely.
Now, I’ve been wrong about the stock market before, and I’ll be wrong again for sure. But most people tend to be wrong about half the time — that’s how guesswork goes. And when everyone is scared of a crash… that’s when they tend not to happen.
I reckon another stock market crash before I retire is likely. I just have no idea when. So even if I might not expect my stocks to fall next week, how am I prepared for whenever the next slump might be?
Diversify
I have City of London Investment Trust (LSE: CTY) as a cornerstone of my Stocks and Shares ISA. And that helps in several ways. It gives me some welcome diversification from just a single purchase. It holds Unilever, BAE Systems, AstraZeneca, Tesco… and a whole lot more.
I also rate a good few of its holdings as defensive, with decent safety and not expected to be too volatile.
The dividend helps too, with a 3.8% yield expected. That’s not huge. But the investment trust has raised its dividend every year for 59 years. And the way investment trusts are structured, they can do that even in down years.
The biggest risk I see at the moment is the trust’s share price climb — it’s up 37% in just the last two years. I suspect that, in part, is due to investors moving cash to what they see as a relatively safe investment in troubled times. And when bullishness returns to the stock market, maybe it’ll reverse a bit.
Take the cash
But dividends have kept me smiling through previous downturns, and I’m sure they’ll do it again. Who really cares where our share prices go in the short term if they’re generating steady streams of cash for us?
So keep our eyes on the long term, and consider holding a diversified UK investment trust like City of London — that’s my stock market crash strategy.
