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Another FTSE 100 stock market crash in 2020? Prepare with common sense!

Speculation is rife on the odds of a second stock market crash in 2020. Many FTSE 100 constituents have opted not to disclose their earnings outlook for the year ahead. To be fair, they’re probably not sure how to calculate accurate guidance when none of us have much clue how the future will look. This makes it hard for investors and analysts to know how fairly a stock is priced.

Is bullish sentiment an illusion?

The pandemic and subsequent lockdown created initial panic, followed by furlough schemes and mortgage holidays to ease the stress. This gave people the chance to come to terms with reality and consider their options. For some, it has been a devastating time, for others a welcome break from the rat race. As restrictions are eased, stock market sentiment is turning positive, but this may be premature. It will take time to adjust to a new normal and I think consumer spending patterns will be cautious.

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Hope remains

Don’t abandon hope! Without hopes and dreams, no money would ever be made. Now, if that sounds a little too airy-fairy, I think common sense is needed too. If I were to go out and buy shares in all the highly-pumped AIM shares riding the coronavirus healthcare wave, I think I could quickly lose my savings.

That said, I don’t think investing in the stock market is a mug’s game. If you stick to the relative stability of the FTSE 100, then you’re dealing with businesses that have previously reached an outstanding level of success and it is likely many of them will continue to do so in the years to come.

Be prepared

Here’s how I think you can prepare for a second stock market crash in 2020. For each asset you own, look at its long-term potential for recovery and growth. Check the level of debt in the businesses you own. A high debt ratio could be a recipe for disaster if the markets head south again. But a healthy balance sheet could see you through the downturn and emerge victoriously. Is the company selling a product or service likely to remain in demand in the years to come?

And do you have enough cash reserves to take advantage of a stock market crash if or when it comes? Make a list of equities you have faith in. Watch how they’re dealing with market sentiment. Are the worries and gloom already priced-in? Consider which sectors can withstand the headwinds and survive a bear market. 

Timing the market

Remember to look to the long-term. If you’re aiming for a 10-year time horizon and can cope with price fluctuations without freaking out, then the ‘perfect’ time to buy is arguably irrelevant.

Timing the market is impossible, even for the most experienced investors, therefore waiting for the next stock market crash is not always the answer. If an equity on your watch list looks fairly priced and you’re prepared to hold, then this could be as good a time as any to buy.

I think the FTSE 100 contains some great companies worth owning a piece of. It’s never too late for you to start learning about the stock market and researching cheap shares to buy.

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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.