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What can FTSE 100 investors learn from last week’s market crash?

The FTSE 100 fell by 11.2% last week as fears of a global, uncontained outbreak of the novel coronavirus intensified. The markets have calmed today, but the potential for further share price falls remains. So are there lessons to learn from last week’s crash? Are there actions investors can take now to protect themselves in the future?

Marked to market

Depending on what stocks were owned at the start of the week, by the end of it, a portfolio may have been down by less or more than the market. Some stocks lost a lot more than the FTSE 100 as a whole. Others performed relatively better, losing little or nothing at all. Let’s start by taking a look at the worst performers.

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The bad

The worst performer was TUI, the travel and tourism company. It lost 29.49% over the week. IAG, the airlines group that owns British Airways, fared little better, losing 24.24%, and cruise operator Carnival lost 19.1%. Three of the five worst-performing FTSE 100 stocks last week were travel and tourism-focused companies.

Retailers like JD Sports and pub chains like Whitbread also performed relatively poorly, as did miners like Glencore, Rio Tinto and Anglo-American.

Because of the outbreak, people are travelling less. Pub visits may dwindle if people choose to stay at home. Clothing may be considered non-essential during a viral outbreak or retailers may run out of stock if they get it from China. Miners lost demand from China, which has basically shut down for a month.

The good

At the other end of the scale, NMC, a recently-unpopular operator of hospitals actually posted a 9.73% gain over the week. However, perhaps we should ignore NMC as it’s mired in an accounting scandal, and its shares were in fact suspended last week.

Shares in Just Eat ended the week flat, while the FTSE fell. Publishing company Pearson pretty much did the same. Investors in pharmaceuticals giant GlaxoSmithKline saw their holdings decline by 5.79%. Food retailers like Sainsbury’s and Ocado performed relatively well, their shares declining by 7.1% and 6.3% respectively.

This is easy to understand. People will always need to eat. Food retailers might benefit from people stocking up on supplies. Online food delivery outfits might benefit from people choosing home delivery rather than risking a trip to the shops. Spending on drugs is relatively stable, so pharmaceuticals companies, as long as they don’t source ingredients from China, fared relatively well.

The lesson

If an investor held just travel stocks, last week would have been horrifying. Holding just mining companies would have been unsettling too. But holding shares in food retailers may have left an investor relatively happy by last week’s end. 

So do I think we should all avoid the likes of Glencore and buy Ocado? Well, that might work if the coronavirus causes the FTSE to decline again. But what if the next crash is caused by something else entirely?

The lesson is an old one, and it is to diversify. Don’t hold just miners, or airlines. Instead, look for companies in different industries and sectors. That way your portfolio value won’t be dragged around by the fortunes of one particular group.

Better still, find the best long-term prospects in different industries. Crashes won’t hurt as much, you’ll be less tempted to sell, and you could beat the market in the long run.

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James J. McCombie owns shares in Anglo American and IAG. The Motley Fool UK owns shares of and has recommended NMC Health. The Motley Fool UK has recommended Carnival, Just Eat Takeaway.com N.V., and Pearson. 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.