Over the past few weeks, many investments have erased their losses incurred in the March stock market crash. However, with fears of a second wave of coronavirus spreading, the chances of a second stock market crash are growing.
While it is impossible to tell what the future holds for the stock market, it may be sensible for investors to prepare for the worst.
Preparing for a stock market crash
We don’t know what the future holds for the stock market, but we can prepare ahead.
By looking at the companies that have prospered over the past few months, we can get some idea of the sorts of businesses that may earn market-beating returns for investors in the event of a second stock market crash.
Indeed, some sectors have produced relatively strong performances compared to the rest of the market this year. The technology sector, for example, has reported strong sales and profit growth, as working from home has become more mainstream.
Shares in healthcare companies have also performed well so far this year. The virus outbreak has put healthcare systems throughout the world under an immense amount of strain, but the demand for pharmaceuticals and other treatments has not declined. That implies that in the event of a second stock market crash, investors might be able to seek safety in healthcare stocks.
Companies that manufacture and sell food and cleaning products have also done particularly well. And so have retailers, which sell these products. All of these sectors have seen an increase in demand for their products over the past few months.
They should also benefit from structural market tailwinds over the long term as the global population continues to increase. This population growth should help drive demand growth for products such as food and pharmaceuticals over the long run.
As the world becomes more reliant on technology, this sector should also continue to grow. These themes suggest that even if a second stock market crash arrives, companies in these sectors should be able to weather the storm.
Diversification is key
Clearly, the outlook for the global economy is highly uncertain at present. Nevertheless, as noted above, some sectors may fare better than others in the new normal and if another stock market crash occurs later this year.
Picking the companies that may benefit from these themes is the hard part.
As such, it could be best to buy a diversified basket of high-quality stocks with strong balance sheets from the sectors outlined above. Doing so may allow you to benefit from their sector performance while minimising downside risk if one, or several of the companies you own starts to struggle in a second stock market crash.
Another strategy could be to buy a basket of investment trusts of funds. Doing so would enable you to build a basket of stocks at the click of a button. There’s a whole range of funds on the market that target a particular sector such as pharmaceuticals or technology.
So, if you are not particularly confident picking stocks yourself, these funds can do the hard work for you. They also provide much-needed diversification at a relatively low cost.
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Rupert Hargreaves owns no share mentioned. 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.