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Expecting a stock market crash? Here’s how I’d get my portfolio ready

Financial analyst Gary Shilling has told CNBC that the stock market could crash between 30% and 40% over the next year. The thinking is that investors will be disappointed at the recovery from the coronavirus recession taking longer than they currently expect.

I can’t predict the future, but if you agree with Shilling and think there could be a stock market crash around the corner, then here’s how I’d get ready.

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Keep calm and take sensible risks 

First of all, I wouldn’t panic. As no one can predict the future accurately it’s best not to try to time the market. Selling shares now could mean missing out on gains and there’s evidence to suggest that trying to time the market is futile. Successful fund manager Terry Smith has himself made this argument. His record is very good and so he’s worth listening to.

The key instead is to be sensible about risk. This means having defensive shares, meaning those that will keep trading well in any market environment. Examples of these types of industries are supermarkets and pharmaceuticals.

Cyclical shares are likely to have more volatility – known sometimes as beta. They go up more in the good times usually but fall faster and further in the bad times. There will be exceptions to this but generally the higher the beta the riskier the shares become in a market downturn.

Check your portfolio is diversified

You’ll want to check that you don’t inadvertently have all your eggs in one basket. I found that, through several trusts and funds, I have more exposure than I realised to the big US tech companies. This has been good for my portfolio as those shares have risen. But if they were to start to free fall the opposite would be true.

It is a good idea to check on overlaps between industries that you hold and make sure no sector is too dominant in your portfolio. That way if the stock market crashes, or even if sentiment towards one industry changes, the impact shouldn’t be so big.

Cash is king, especially in a stock market crash

The third thing I’d do to prepare for any future market crash is I’d keep cash ready. This isn’t the same as selling shares and trying to time the market. It’s about keeping cash for when shares that I want to buy reach a price that looks good value to me.

Without cash ready, an investor can’t take advantage of special situations that often only come around rarely. It’s always worth having some cash ready for when shares are become cheaper because of a market fall like we saw back in March.

This is what I’d do then to prepare for a stock market crash, whether it comes fairly soon as Shilling predicts, or whether it’s something else further away that causes stock markets to fall.

It’s inevitable that markets will present buying opportunities at times. I think it’s always worth being well prepared to take advantage of these opportunities. 

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Andy Ross 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.