It was almost a year ago when we experienced the 2020 stock market crash. The FTSE 100 index fell from around 7,400 points to 5,000, a move of over 30% in just one month. Quite a few market analysts had been calling for some kind of market correction due to inflated prices. However, few could have predicted Covid-19 and the impact it would have on the stock market. Panic set in, hence the change from just a correction to a crash. Chatter is rising again about the potential for a 2021 stock market crash, so what should I do?
A 2021 crash could be coming
The main reason I see for a 2021 market crash is due to the disconnect between the market and reality. For example, UK unemployment is at the highest rate in five years. The number of Britons claiming universal credit has doubled since the start of the pandemic. Yet what about the FTSE 100? It’s down less than 200 points versus this time last year.
I could make the argument that most of the FTSE 100 companies are international and so the fate of the UK doesn’t impact them that much. But the FTSE 250 (a more domestic gauge) is actually up almost 9% over a one-year period!
From this, I’m wary that another stock market crash in 2021 could be coming. I could be wrong here, and merely overly pessimistic due to the pandemic hangover.
In response to a potential crash I’d make a list of the stocks I own that could be most sensitive to a crash. So I’d be looking at stocks that currently have a high valuation and a high P/E ratio. For example, I’m bullish on the London Stock Exchange Group. Yet, given that the price has doubled in two years and has a P/E ratio of 65, I’d be very careful as this could be hit hard in a market crash.
Another way I’m preparing for a market crash in 2021 is looking to increase my holdings in dividend stocks. I recently reviewed some good options here. Dividend stocks allow me to pick up income, regardless of what the share price does. So if a crash does come and I’m stuck holding stocks that are heavily down, I can be content with picking up dividends during this holding period (as long as dividends aren’t cut, of course). Then, if the market comes back higher, I’ll have something to show for it.
Not a time to panic
The third way I’m preparing for a potential market crash is trimming some profits from stocks I’ve held for years. And finally, I’m looking to hold these realised profits in cash. This gives me some dry powder to look to buy shares I think are at attractive prices and can reward me over the long term. I’m only doing this with a small amount of money though. The risk here is that a crash doesn’t come, and I’m losing out from holding money in cash and not being invested.
Even if a market crash does come at some point in 2021, I’m not going to panic. After the crash we saw last year, the market rebounded fairly quickly. If I’d prematurely sold out of everything, it would have been the worst thing to do. As a long-term investor, even a crash shouldn’t faze me too much.
jonathansmith1 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.