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How I’m preparing for the next stock market crash

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The chances of a second national lockdown are increasing. This means the chances of a second stock market crash are also growing. With that in mind, I’m going to explain how I’m positioning my portfolio to deal with the possibility of another decline. 

Stock market crash round two 

The market decline earlier this year caught a lot of investors by surprise. This time around, we’ve had a bit more warning. After six months of the coronavirus crisis, it’s clear which businesses have been able to make the most of the situation, and which have struggled. 

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For example, travel companies such as IAG and Tui Travel have suffered. Other businesses that rely on cramming a lot of people into a small space, such as Cineworld, have also suffered significant declines in sales and profits. 

However, on the other side of the equation, companies that provide cleaning products have seen sales rise. Reckitt Benckiser is just one example. Essential retailers such as Tesco and Morrisons have also reported relatively lively trading performances over the past six months. 

Technology is another sector that seems to have been able to navigate the crisis exceptionally well. Businesses such as Computacenter and Softcat have reported expanding sales and profits as the demand for their services has increased. 

Two companies that have also benefited from uncertainty in 2020 are financial services groups IG Group and CMC Markets. Both of these companies have benefited from the elevated volatility in financial markets. I think they would almost certainly benefit in the same way from a second stock market crash.

IG and CMC make money by taking a tiny slice of every trade investors place. A higher number of trades should result in a higher level of income for these companies. That’s just what happened in the first stock market crash. I reckon there’s a good chance history will repeat itself in round two. 

Time to prepare

I’m preparing for the next stock market crash by implementing the lessons of the past six months. The companies that have been able to make the most of the coronavirus crisis and avoid the worst, may be in the best position to navigate the second wave. 

With that being the case, I’m focusing on high-quality blue-chip growth stocks in my portfolio. I’m trying to avoid any companies that may face increased uncertainty in the months ahead, either due to additional lockdowns or high levels of borrowing. 

I reckon companies such as Reckitt and Tesco will continue to prosper as the demand for essential goods and cleaning products remains high. At the same time, technology is becoming an increasingly important part of our everyday lives. It doesn’t look as if this trend will reverse. So, I think owning a diversified basket of tech stocks is a sensible decision. 

While this approach won’t guarantee that my portfolio will be immune from a second stock market crash, I reckon it will help protect me from the worst. Focusing on high-quality growth stocks may also lead to higher total returns in the long term.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Softcat and Tesco. 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.

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