As an investor, I’m increasingly nervous about what the rest of 2021 has in store for my portfolio and whether another market crash is on its way. This is what I’m doing about it.
Market crash ahead?
It’s not hard to come up with reasons why we could be teetering on the edge.
You have the fact that many stocks, particularly in the US, are now at gravity-defying valuations. This is not dissimilar to what we saw at the turn of the millennium. Back then, loss-making dotcom stocks were all the rage. When company fundamentals no longer matter — which appears to be the case for some stocks now — it often ends in a market crash.
But it’s not just share prices that are making me skittish. The eye-popping popularity of volatile investments such Bitcoin and the herding behaviour witnessed during the recent Gamestop/short-selling episode, are also potential red flags. Both have arguably been driven by a wave of new, inexperienced retail traders seeking excitement (and riches) while stuck at home. Any strategy based on hoping someone else will pay a higher price for something (the ‘greater fool’ theory) is fraught with danger.
Another worrying trend is the big spike in IPO activity. Some of these newly-listed companies may turn out to be great investments, but many will not. At times like this, it pays to remember that we’re being invited to buy something that its original owner no longer wants to fully own. The most likely reason for this is that they feel they’re selling when sentiment is at its highest.
All of the above are indicative of the final stages of a bull market, I feel. As such, I suspect the odds of another crash have shortened considerably.
What I’m doing about it
One key way of preparing for the fallout is ensuring my portfolio is properly diversified. This involves checking that I have a shares in different sectors and reducing my exposure to anything highly speculative.
It’s also important to know how long I plan to stay invested for. Young investors can be risk-tolerant because they have the time to make up for any losses. Older investors, either approaching or in retirement, may need to be more prudent. In theory, it makes sense for them to reduce their exposure to risky equities.
Keeping some cash in reserve to mop up some bargains if they appear among fallen shares with sound fundamentals is never a bad idea. The recovery seen since last March is proof that a market crash can actually be a wonderful opportunity to make money.
Successful investing is as much about keeping our emotions in check as it is about good money management. This is why not looking at a portfolio too often is so important. If I find myself doing this, I either delete my broker’s app or spend time researching great companies to buy if share prices plummet.
I don’t know for sure whether markets will plunge in 2021. No one does. Even so, I do think it’s vital to be realistic and question whether recent momentum can be sustained. The time to be worried is when everyone else isn’t.
As for me, I found some wonderful bargain UK share in the last market crash. I hope to do the same if it happens again.
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Paul Summers 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.