Should I start preparing for a stock market crash? Some investment analysts and market commentators would have me believe that now’s the right time to do so.
After a year of explosive gains, equity markets around the world look richly valued. Rising equity prices seem out of whack compared to the economic situation in many countries.
They also seem a bit skewed compared to the fundamental performance of certain companies. Some of the most highly valued equities globally are losing money hand over fist, and many others are struggling to earn a sustainable income.
At the same time, it looks as if central banks may begin to start increasing interest rates next year. Higher interest rates may discourage investors from buying stocks. This could lead to a stock market crash in a worst-case scenario.
And in the background, the pandemic’s still rumbling on. And it doesn’t look as if it’s going to end anytime soon.
Predicting a stock market crash
There are certainly some compelling reasons why we could be about to see a stock market crash. However, trying to predict market movements is almost impossible. Even the most experienced Wall Street or City analyst is unlikely to be able to predict when the next crash will happen.
Moreover, here at The Motley Fool, we’re long-term investors. We’re not trying to predict what will happen in the stock market over the next year or two. Instead, we’re looking for companies likely to generate attractive returns for investors over the next five, 10, or 20 years.
This is the approach I’m currently using. While I’m aware we could be about to see a market crash for the reasons outlined above, I’m not going to take any particular action to prepare for a possible decline.
The best companies
I’ll continue to focus on what I believe are the market’s best equities. I think companies like Diageo and SSE will continue to generate steady returns for investors over the next decade or so.
Even if shares in these companies are cut in half tomorrow, I don’t think people will stop consuming alcohol or stop using electricity. These businesses provide products and services that consumers like and need. So sales of these products will continue no matter what happens to each firm’s share price. Therefore, I’d buy both of these equities for my portfolio.
I’d also buy shares that may actually benefit from a stock market crash. A great example is the financial services provider IG Group. This company makes money when people trade stocks, commodities and foreign exchange instruments on its platforms. Trading activity tends to increase in periods of volatility, such as a market crash.
Therefore, IG may report an increase in profitability if the market slumps. Unfortunately, this is a bit of a double-edged sword. Trading activity can jump during periods of market volatility, but it can also sink when the environment calms down. As such, this stock might not be suitable for all investors.
