It’s been relatively easy to make money in the recovery phase from March’s stock market crash. The FTSE 100 has been climbing strongly, pulling up many – although not all share prices with it. The recovery, however, is not secure, and a further market correction is a possibility. This is what I’d do if there is another stock market crash.
Relax, read, and learn
This is the hardest part. Being a long-term investor helps to some extent but even so it’s nerve-wracking to see your shares head down. Know first of all you’re not alone and second of all, it’s up to you how you react in a crisis.
The best reaction I believe is to initially do nothing. Try as hard as possible to relax, focus on something other than the market, and occasionally monitor the news so you can anticipate what is driving the market. Use the time to read about other investors. From this you’ll gain confidence that all experienced investors have come through broadly similar market corrections. This learning will serve you well as the fall bottoms out and the market starts to recover.
Invest in defensive companies
Regardless of how quickly the market recovers, I’d buy shares in defensive companies. These types of companies can sell their products or services in any economic environment. Think supermarkets, pharmaceutical companies, and similar.
In my opinion, defensive companies are worth holding as part of a balanced portfolio of shares. Many have outstanding qualities for long-term investors, such as sustainable, growing dividends; rising revenues, profits and earnings per share; product innovation; and loyal customers.
Seek bargains when the stock market crashes
Once the stock market cash starts to flatten that’s when it is best to start to buying into shares. It’s not without risk, because the market could take a breather and then head further down. However, at some point, it’s best to take a leap and buy quality shares at a lower price. Signs a share may be a bargain include a low price-to-earnings ratio or a share that has fallen further than the rest of the market.
By buying shares at a low price and either holding them for a long time or selling them when the price is much higher you can make big profits from investing in shares. At a time when the interest on £5,000 in a bank savings account won’t buy you a Mars bar, having share prices that could rise in value is a smart move.
This is the plan I have developed in the recent bear market, which was one of my first big ones. I’m pleased to say I sold nothing at the bottom and picked up shares in Intermediate Capital Group that are now up over 60%. This plan works and I advise seeing a market crash as an opportunity, not a threat. Thinking this way gives you a big advantage.
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Andy Ross owns shares in Intermediate Capital Group. 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.