Fear a stock market plunge in 2020? Here are 4 brilliant ways to prepare

Forget 2019, this Fool suspects next year might be an even tougher one for investors.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lately, it’s been hard to find many analysts who are optimistic about the health of the market. Concerns over slowing global growth and the US/China trade ding-dong continue to weigh on minds. Oh, and that Brexit thing is dragging on a bit, isn’t it?

Since it can take a while before the full impact of economic uncertainty filters down into the stock market, I’m beginning to suspect 2020 could turn out to be another tricky one for investors. Ultimately, we can’t predict but we can prepare. Here, then, are four suggestions what you can do. 

1. Keep some cash handy

To survive a downturn relatively unscathed, it makes sense to think not only about tackling any lingering, high-interest debt but also about what costs you have coming up in the near-term.

Do you have a would-be house deposit currently tied up in investments and intend to buy a property in the next year? If so, it may be prudent to move this money into cash to ensure it doesn’t lose value when you most need it. Do you have sufficient savings to cushion the blow of a period of temporary (but nevertheless unexpected) unemployment? If not, start building an emergency fund for if/when the bad times hit.  

2. Get diversified

If you haven’t checked how diversified your portfolio is, do so soon. It’s remarkably easy to forget the importance of spreading your wealth around different assets, particularly following the sustained period of share price appreciation we’ve experienced since 2009. 

Naturally, what you decide to do with your own investment portfolio will depend on your age, financial goals, and risk tolerance. As a rough rule of thumb, however, those nearing retirement should consider dialing down (but most certainly not eliminating!) their exposure to equities. Younger investors arguably have less to worry about, but it’s still worth asking whether companies held are sufficiently resilient, particularly if they already have shaky balance sheets, or operate in cyclical sectors.

3. Understand market cycles

Bear markets are part and parcel of investing. You can’t avoid them and you’ll never know exactly how you’ll respond until you’ve experienced one. As the great sage Mike Tyson once said: “Everybody has a plan until they get punched in the mouth.

Notwithstanding this, you can, at least, educate yourself about these things before they happen, if only to gain an appreciation of just how common they are and how long they tend to last for.

According to a study by Yardeni Research, the 36 corrections and bear markets in the US since 1950 have lasted for an average of just 196 days — worth remembering before you aim to push that ‘sell’ button. For more on this, I heartily recommend the writings of investing legend Howard Marks.

4. Buy the dips

As we never tire of saying, private investors should regard market downturns as an opportunity to acquire great businesses at far more reasonable prices. They are, in short, a chance to accumulate. 

This might sound easy, but it’s not. If you’re concerned about the market falling further after purchasing a stock or fund, you may wish to drip feed your money rather than all at once. No one manages to buy at the bottom consistently but, assuming the investment case is solid, averaging-in to a position makes more sense than waiting for a price that may never come.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »