Stock market crashes are notoriously hard to predict. Ultimately, it’s anyone’s guess whether we’ll see one in 2020.
That said, with global equity indexes at high levels and economic uncertainty rising, I think it’s prudent to think about downside risk right now. With that in mind, here’s a look at how I’ve prepared my investment portfolio for a stock market crash.
The first thing I’ve done to prepare for a pullback is optimise my asset allocation so that I’m comfortable with my risk exposure. Currently, a large proportion of my portfolio is invested in well-established FTSE 100 dividend-paying companies that have stood the test of time, such as Unilever, Diageo, and Reckitt Benckiser.
While these types of stocks are still likely to fall in a major crash, in the past they’ve tended to hold up better than expensive growth stocks. So, owning these provides peace of mind. Moreover, I’d expect them to continue paying out dividends if the market crashed. I’d then be able to use those dividends to buy cheap stocks.
While I do own a number of smaller growth stocks as well, I’m keeping a close eye on my exposure here. These kinds of companies tend to get hit the worst in a crash and can fall 30-40% in the blink of any eye, so I don’t want to be overexposed to this area of the market.
Large cash pile
The other thing to note about my asset allocation is that, recently, I’ve been following Warren Buffett’s lead and stockpiling cash in preparation for a pullback. Currently, my portfolio is about 20% cash.
Having this cash available on the sidelines gives me powerful options in the event of a stock market crash. If panic sets in and high-quality companies are available at bargain valuations, I’ll be ready to strike.
Market crash buy list
Finally, I’ve also put together a wishlist of the stocks I want to buy in the event of a market crash, along with target prices for each stock. This means I’ll have a robust plan I can stick to if things get a little crazy.
As for the companies on my wishlist, they tend to be high-quality FTSE 100 companies that often trade at higher valuations. Names on the list include Sage, IHG, Smith & Nephew, Diageo, and Unilever.
There are also a few mid-cap stocks, such as Softcat and Gamma Communications, smaller companies such as Alpha FX and Keystone Law, and international stocks such as Microsoft and PayPal, I’d be keen to buy if the price was right.
So, that’s how I’ve prepared for a stock market crash. Having optimised my asset allocation and stockpiled a ton of cash, I feel I’m well prepared should markets take a hit in the near future.
We recommend you buy it!
You can now read our new stock presentation.
It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.
They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.
That’s why they’re referring to it as the FTSE’s ‘double agent’.
Because they believe it’s working both with the market… And against it.
To find out why we think you should add it to your portfolio today…
Edward Sheldon owns shares in Unilever, Diageo, Sage, Softcat, Alpha FX, Keystone Law, Microsoft and Reckitt Benckiser. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft, PayPal Holdings, and Unilever. The Motley Fool UK has recommended Alpha FX, Diageo, InterContinental Hotels Group, Sage Group, and Softcat and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.