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Worried about a stock market crash? Then do this now

Once again, recession drums are beating. The US trade war with China is knocking confidence. GDP growth is sliding. The Fed is now expected to cut rates to or three times this year rather than raise them. Analysts are even talking about a rerun of quantitative easing.

The threat of escalating conflict with Iran, capital flight from Hong Kong if China presses ahead with extradition proposals, and EU bust-ups with Italy and the UK are only adding to the tension. So how do you respond?

Not the end of the world

As ever, you should stay calm. It’s easy to bundle together a few geopolitical worries, as I’ve just done, and claim it’s the end of the world. Analysts have been warning of a recession for the past decade. Instead, we got the longest bull run in history.

Anybody who shifted their money out of shares and into cash will be kicking themselves. If you had paid £20,000 into the average savings account 20 years ago you would now have just £24,753, according to Fidelity, but the FTSE All Share would have turned that into £55,319.

Stocking up

You need to hold some money for emergencies but I think most of your long-term retirement savings should go into stocks and shares. Yet many will be understandably nervous as people keep banging on about a recession and market correction. So how do you invest safely? There’s a simple answer – set up a regular monthly investment plan.

There are so many advantages to saving every month. First, after a while you will not notice the money leaving your account, as you adjust your spending around it. This makes investing effortless.

Buying the dips

Investing monthly also helps you avoid the risk of putting a single lump sum into the market, only for shares to crash next day. It can also turn stock market volatility in your favour. You actually benefit if share prices dip, because your monthly contribution will pick up more stock at the lower price.

Over the 20, 30 or 40 years you are saving for retirement, stock market volatility actually works in your favour. 

At the same time, you should also reinvest all your dividends back into your shares or funds, as this way you will pick up even more stocks or units. This will boost the size of your holdings and generate yet more income and growth in an endless virtuous circle. Incredibly, reinvested dividends will provide the majority of your returns over time.

Save tax-free

Save inside a Stocks and Shares ISA, because this way your returns are free of both income tax and capital gains tax for life. The best online platforms will allow you to invest from as little as £50 or £100 a month.

The first pound you invest is the most important as this will have longer to grow, so do not delay. Just remember to increase your monthly sums in line with prices and pay rises. Never invested in your life? Here’s how to get started.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.