The recent stock market crash caught a lot of investors by surprise. Luckily, since the market’s March plunge, investor sentiment has improved dramatically.
However, several risks are facing the global economy that may cause a second stock market crash in the coming months. These include a second wave of coronavirus, which could wreak havoc across many of the world’s major economies.
Rising trade tensions between the US and China and the UK and Europe may also cause inventor sentiment to deteriorate.
Therefore, it may be sensible to wait for a second stock market crash before buying cheap shares. The outlook for these companies could deteriorate even further if the economy faces further headwinds in the months ahead.
Preparing for a stock market crash
Unfortunately, it’s impossible to tell what the future holds for the stock market. As such, is always sensible to prepare for a crash. One could be just around the corner.
Over the past few decades, the stock market has experienced many peaks and troughs. Market crashes are just part of investing, which is something investors have to get used to.
One of the best strategies for navigating market volatility is to have lots of cash on hand. This provides peace of mind so you can pay for unexpected costs and allows you to capitalise on low valuations across the stock market when they emerge.
After the recent stock market rally, many high-quality investments that were trading at discount valuations after the stock market crash now look expensive.
With this being the case and with so much uncertainty on the horizon, rather than paying a high price for these high-quality businesses, it may be a better decision for investors to sit back and wait for the next downturn to come.
That being said, as noted above, it’s impossible to tell what the future holds the stock market. As such, it might also be sensible to buy a small number of these businesses in a diversified portfolio now so you can benefit if the stock market recovery keeps going.
At the same time, holding some cash back for a second stock market crash may enable you to capitalise on low valuations when they emerge.
A long-term view
The outlook for the world economy is highly uncertain right now. However, the economy and the stock market both have strong track records of recovering from significant setbacks. It may take several months or years, but the same is likely to happen this time around.
Therefore, adopting a buy-and-hold strategy of high-quality stocks while also retaining some cash could allow you to benefit from improving performances over the coming years.
By combining the risk-free nature of cash and return potential of high-quality businesses could boost your portfolio in the coming years while being prepared for all market environments.
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Rupert Hargreaves has no position in any of the shares 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.