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How to prepare for another stock market crash

Some analysts are sceptical the market can recover any time soon from the March stock market crash. Others are alarmed by the rise in the number of cases in the US. There’s also the threat of a new virus emerging from China. It’s enough to make anyone want to just stay in bed under the duvet all day watching Netflix.

Yet businesses and stock markets frequently deal with big issues. Admittedly not a global pandemic – at least not for about a century – but all manner of other unforeseen (but also in some ways predictable) events such as the dot com bubble bursting, 9/11, and the recession following the credit crunch over a decade ago.

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All these events created a panic very similar to the one we saw in March. Although markets haven’t fully recovered so far we’re on track for a V-shaped recovery. However, this progress could be reversed swiftly. With that in mind, here is what I’d do to protect my portfolio.

Using diversification to beat another stock market crash

Although I’m certainly not a fan of investing directly in gold, getting access to it via an investment trust investing in gold miners may be a useful hedge. The Scottish Investment Trust moved earlier this year to make several miners its biggest holdings. The share price has done relatively well this year.

Speaking more broadly about investment trusts, I think they are a good way to access a wide range of holdings. When markets fall, this diversification is valuable. Also, at a time when dividends are being cut left, right, and centre, even by the big FTSE 100 companies, it’s good to know investment trusts can keep rewarding shareholders. The trusts can keep reserves, so many have the cash to keep paying dividends to shareholders in this tricky market.

Focus on total returns

Given income is increasingly hard to come by, I’d focus on total returns. This is an approach that has been recently endorsed by successful fund manager Terry Smith. With dividends so precarious, it seems more sensible to focus on shares that can grow in any environment. These will be companies that have strong competitive advantages or monopolies, or enjoy strong pricing power and margins.

In my view companies that have some of these qualities are likely to be winners in this environment, while also being prime candidates as profitable long-term investments.

Keep some cash spare

Lastly, if you are of the view that it’s sensible to be ready for the possibility of another market crash then it’s also prudent to keep some cash on hand. If stock markets crash it’s usually sharply and for a limited time. You want to buy shares at the bottom and not panic sell. The cash will be useful for buying up shares you think will prosper at a much cheaper price. Buying Intermediate Capital Group in late March showed me just how rewarding this type of investing can be.

All of this I believe will help you to best get through any future stock market crash. 

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Andy Ross owns shares in the Scottish Investment Trust and 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.