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3 simple steps I’d take to prepare for another FTSE 100 stock market crash

The FTSE 100’s stock market crash in February/March 2020 took almost all investors by surprise. It was caused by an exceptional event that was unprecedented, so many investors were unable to prepare for it.

Looking ahead, risks such as a second wave of coronavirus, Brexit and the upcoming US election could cause investor sentiment to weaken. This may result in a further stock market crash in the coming months.

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Here’s how investors may wish to prepare for that prospect, while continuing to invest in undervalued stocks today to benefit from a likely long-term recovery.

Cash holdings

Avoiding FTSE 100 shares and holding your capital in a cash savings account is likely to mean lower returns over the long run. However, having some cash on hand in case the stock market declines over the coming months could be a shrewd move.

It may allow you to capitalise on even lower stock market valuations without having to sell other assets. Furthermore, it can provide an investor with the ability to quickly react to market downturns if cash is easily accessible.

Holding some cash instead of being fully invested in FTSE 100 shares may also provide peace of mind. Having sufficient capital available for emergencies that may unfortunately become more common over the coming months, such as employment challenges, could also be a prudent move. It should mean you are not required to sell stock market investments at lower prices.

Identifying FTSE 100 companies

The FTSE 100’s recent rebound may mean that some stocks are now trading at price levels that you feel are somewhat unattractive. However, it is still a good idea to analyse those companies now to determine whether they could offer good value for money. After all, they could be bargains if a market crash occurs over the short run.

Being in a position to buy specific stocks quickly could be an advantage for an investor. As the recent market crash showed, the window of opportunity to buy shares can be relatively short. Being in a position where you know which companies you want to buy, and at what general price, could allow you to react more quickly to rapidly-changing market conditions.

Opening a Stocks and Shares ISA

Buying FTSE 100 shares today in a Stocks and Shares ISA is a simple and low-cost means of investing in a tax-efficient manner. Therefore, ensuring that you have an ISA opened and ready to be used for investing in a diverse range of companies right now could be a sound move ahead of a possible market crash.

If you are ready to invest in high-quality stocks then you may be better placed to capitalise on what could prove to be a very volatile stock market as the world gradually emerges from a period of lockdown measures.

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Peter Stephens 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.