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Here’s how I’d deal with a second stock market crash in October

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Will a second stock market crash hit home in October 2020? There are gathering clouds, and they look to me like they’re getting ever closer. A second wave of Covid-19 infections? The UK’s headlong rush towards a calamitous Brexit? Neither of those makes me think investors are going to enjoy a winter of rising share prices.

Fears of second lockdown wipe £50bn off UK stocks’. That’s just one of the attention-grabbing headlines from the past week or so. But what does that really mean? £50bn sounds like a lot of money and, of course, it is. But just presented like that, it can be misleading.

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The total value of the FTSE 100 is somewhere around £1.5 trillion. £50bn is about 3.3% of that, and represents a movement of approximately 195 points for the index. Over the past 25 weeks, the Footsie has gyrated by well over 1,000 points either way. It’s been as low as 4,899 points, and as high as 7,690 (to the nearest point).

A £50bn fall is nowhere close to a second stock market crash. Of course, the journey to a stock market crash starts with the first fall. And I think we’re very unlikely to see a repeat of the precipitous drop we experienced in February and March this year. But the index had been steadily falling back from its early partial recovery. With a year-to-date drop of 21%, it’s not that far off the 30%+ crash we saw in March.

A second stock market crash?

We might avoid an all-out second crash. I am, however, convinced we’re in for a lengthy spell of weak economics and depressed share prices. But, while some people are approaching it by working out their survival tactics, I’m thinking far more positively. For me, the months ahead will be all about how to make best use of this golden opportunity.

If stock market history has taught us one thing, it’s to buy shares when they’re cheap. Isn’t that obvious? Well, it appears not, and there are short-term reasons why people just don’t do it. In a stock market crash, investors tend to expect falling shares to fall further. So, to avoid even greater losses, they sell. And that pushes share prices down further.

Long-term outlook

Just look at the massive swings in the FTSE 100 over the past 12 months. The real long-term outlook for UK shares hasn’t varied by anything like that. In reality, it’s probably hardly changed at all. This year will be a down year, for sure. And next year might too. But the next five years? Ten years? I can see big profits to be made over those timescales.

If I didn’t already have a Stocks and Shares ISA, I’d open one now. And I’d shovel as much money as I could into it. And then I’d invest in top FTSE 100 shares while they’re down.

Tesco down 15% since the pandemic struck? Taylor Wimpey down 45%? National Grid down 10%? Most of the FTSE 100 looks like that. And I can only see one direction these shares are likely to go over the long term, even if the stock market crash gets worse before it gets better.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended 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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