The time is fast approaching when we will all be sat around the dining table discussing various topics during the holiday season. Will whoever is Prime Minister be any good? Will the FTSE 100 crash? Did Mrs Smith burn the gravy?
While we can’t say for certain the answer to those questions (apart from question three — it’s always a no) there’s definite merit in playing out different scenarios depending on your point of view.
For this article, I assume you’re reading on because you are indeed worried about the potential for a stock market crash. But what exactly is a ‘crash’? That’s a fairly general term, but specifically we could term it as a fall of 20% or greater in the value of the FTSE 100 index over a short period of time. And what can we do about it?
The great unknown
First, it must be said that trying to predict the exact timing of a market crash is impossible. It’s such an unknown that it continues to outsmart even the most intelligent analysts in the City. If you simply sold all of your stocks and sat in cash, you could be waiting for months or even years before the market did indeed correct lower.
This could mean that in the period in between, you could be giving up valuable gains. Therefore the first way I would position my portfolio is to resist the urge to sell everything. Quite the opposite, I would stay invested, so that I don’t have the opportunity cost of giving up potential gains.
When you do see the market starting to make a continued move lower (say, around 5%), then you can look to transition out of some stocks, but selling when the market is still stable is not wise, in my opinion.
Yet this doesn’t mean that we have to simply sit on our hands.
Use the time now before any potential fall to adjust your portfolio so that it’s well diversified. For example, if you hold 10 stocks in your ISA, all of which are from the same industry within the FTSE 100, this isn’t diversified at all.
If we saw a crash led by this particular industry (think of the banking sector in 2008/09) then you could be overly exposed to depreciating share prices.
Therefore, I would suggest selling some stocks if you’re concentrated in a particular industry, and buy some well reported stocks that diversify your risk. Doing this across industries is a start. Also, look to diversify around the world. For example, HSBC is a truly global firm, with limited exposure to the UK economy. Therefore, if you’re worried about a UK-specific recession, buying into firms like HSBC could act as a buffer for you if a domestic recession happens.
Overall, no one can predict the exact timing of a stock market crash. Yet take this opportunity if you’re concerned to readjust your ISA holdings. In my opinion, don’t sell everything, but do look to diversify. And don’t forget — a crash could also mean some fundamentally strong companies trading at temporarily low valuations that could pay off come the recovery. Have your well-researched watchlist ready so you can take advantage of this.
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Jonathan Smith has no positions in the firms mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.