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How to invest if the FTSE 100 market crashes

Another FTSE 100 market crash is inevitable. Unfortunately, nobody can say with any confidence when it will be or what will cause it. It could be next month and due to a new wave of coronavirus infections. A hard Brexit could crash the market early next year.

Investors may already be reeling from the last FTSE 100 market crash in March. Hearing that another one is always on the cards might make them run away from stocks for good. This would be a mistake. Market crashes are part and parcel of investing. Rather than fear them, investors need to learn how to deal with them. That means both avoiding financial ruin when markets crash and seizing the opportunities that they offer.

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Portfolio protection

A market crash does not sink all stocks equally. Some groups of stocks will do worse than others depending on the cause of the crash. Oil & gas and travel stocks got hammered this last time around. In 2009 it was the financial stocks that took the bigger beating.

Since it is difficult to say what will cause the next market crash, a portfolio is better prepared to deal with it if it contains stocks from multiple industries. You would not have wanted a portfolio loaded with bank stocks in 2009, nor one full of airlines and cruise ship operators in March of this year.

The FTSE 100 has stocks from 10 industries but does suffer from concentration in a few of them as can be seen in the table below. For example, there are 10 times as many consumer services companies, like Ocado and Informa, as there are telecommunications companies like Vodafone and BT. An investor might like quite a few of the 12 or so consumer goods stocks, but struggle to choose which (if any) of the two oil & gas stocks to invest in.

Industry Number of FTSE 100 stocks Average analyst buy rating percentage
Telecommunications 2 65%
Consumer Goods 12 58%
Health Care 4 53%
Consumer Services 22 51%
Industrials 16 47%
Basic Materials 11 46%
Oil & Gas 2 45%
Financials 21 45%
Technology 3 44%
Utilities 5 38%

Picking the top-rated stock from each industry is one way to diversify industry risk with the lowest number of stocks and the least amount of fuss. Of course, some industries are  fancied to do better than others. At the moment, 58% of analyst ratings for consumer goods stocks, like British American Tobacco and Persimmon, are ‘buy’s. An investor could look to add a few extra stocks in the more favoured industries if they choose to.

Market crash opportunities

The best guess for the long-term direction of stock market returns including dividends – yes, there is a dividend drought at present, but it won’t always be this way – is up. Market crashes offer the chance to pick up more shares for your money because they are cheaper. Cheaper shares pay the same amount of dividends and behave just like shares bought at higher prices in the long run.

But as stated previously, predicting the ups and downs of the market is tough. Therefore taking advantage of market crash opportunities can be as simple as not hesitating to invest when the markets are falling. Buying into markets as they rise, only to stop when they fall will increase the average price of the shares bought. Regularly investing will lower the average purchase price of FTSE 100 shares by taking advantage of market crash opportunities.

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James J. McCombie owns shares of British American Tobacco, BT Group, and Vodafone. 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.