As stock market investors we need to be prepared for all possibilities.
This includes being prepared for a stock market crash, as we have learned from last year’s experience. Typically, it is unlikely that a big stock market crash in one year is followed by another the next year, but it does no harm to be ready.
Where did the stock market rally go?
If we look at the stock market indexes in February, it is evident that the stock market rally has vanished. In fact, there was a fall in the FTSE 100 index average compared to January.
This may not be sustained or result in a market crash. Vaccinations, stimulus, low interest rates, and a growth bounce back are big reasons for the financial markets to stay buoyant.
Unless there is a fresh surge in coronavirus cases or the economy is in a far worse state than any of us imagine at this point, I think UK shares are set to do well in 2021.
What if there is another stock market crash?
But if the risks play out, here are the three things I would do.
#1. Buy fear: I’d keep funds aside for investing when share prices are low. Many FTSE 100 shares have more than doubled from the lows they hit when the stock market crashed. In fact, many of them gained soon after. And this includes even those that were the worst hit like travel and tourism stocks.
If I think there is real long-term value to these stocks, I would not hesitate before buying these shares. I reckon that they could double my money in just a few months, but even if they do not, it is a great way to buy high-quality stocks at low prices.
#2. Hold on: I would hold on to my portfolio stocks. Even if at the moment there was little money to be made, I would not like to lose any. All gains and losses are notional until we sell the shares we hold. And a market crash is never the time to sell otherwise higher value stocks.
#3. Load up: This is true for income stocks as well. A low or no-growth income stock can be a real drag on the investment portfolio. Many companies stopped paying dividends last year and, as a result, their share prices fell even further.
But if I had loaded up on those stocks then, today my dividend yield on them would be even better after they reinstated passive income.
The take away
In sum, the three things I would do are – buy, hold, and load up on existing holdings. I know it is easier said than done. We really never know whether the path ahead will get better or get worse.
But if past stock market crashes are any indication of the trend, then we would be better off getting really optimistic when things go bad. It can be quite good for our investments.
