For what it’s worth, I’m also inclined to be more bearish than bullish right now. That said, I’m very aware that trying to predict the direction of markets, at least in the near term, is a waste of time.

What I can say without any hint of sensationalism however, is that a crash is coming. We just don’t know when.  

Regardless of timing, here’s how I’d deal with it. 

Be prepared

The best way to deal with a market meltdown is to anticipate it: get your finances in such a state that you know you’ll able to ride out any volatility without losing sleep. “Forewarned is forearmed“, as the saying goes.

Ultimately, this means checking that the way your money is allocated matches your risk-tolerance. Since they often fall the hardest, there’s no point holding just stocks if you panic at the first whiff of trouble.

Stocks should remain the core of your holdings, but a solution would be to increase your exposure to other assets, such as bonds, property, gold and cash. These are unlikely to give you a better result than equities over the very long term, but should help stabilise your portfolio in difficult times.

Tweet less, read more

This isn’t the place for a detailed analysis of the benefits and drawbacks of social media. Notwithstanding this, I do question the usefulness of sites like Twitter and Facebook (and reading highly emotive posts) during market crises. 

A solution for making it through a meltdown is to read more about how frequent they actually are. Aside from your regular dose of the Fool UK (naturally!), I’d recommend the writings of US psychologist Daniel Crosby — author of ‘The Laws of Wealth‘ — for this. Clearly, the classic thoughts of Warren Buffett and his teacher, Benjamin Graham, are always worth revising.

Ditch ‘the twitch’

A third recommendation is deleting anything on your phone relating to your investment account(s).

Since we’re long-term investors, compulsively checking your holdings through mobile apps is counterproductive but particularly so when the next crash happens. “A watched pot never boils” can be adapted to “a watched pot never boils but continually fretting over your portfolio can breed unnecessary action and reduced returns“. Not quite as catchy, but you get the gist. 

If you’ve done the groundwork to get things in order, you should be able to stay logged off until the storm passes. 

Get a watchlist

Having prepared yourself for the worst (and with cash on hand), you can now take steps to profit from a crash as and when it happens. For me, this starts by drawing up a list of stocks I’d want to buy on any share price weakness. 

To be clear, buying when everyone is selling sounds easy in theory but is very difficult to do in practice. Faced with financial ‘apocalypse’, it’s remarkably easy to forget that stock markets chug higher over time, despite enduring similar crises in the past. 

Should you be able to rise to the challenge, however, you can be confident that the end result will be worth holding your nerve for.  

The post Do you fear a market meltdown? Here’s what I’d do appeared first on The Motley Fool UK.

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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.

The FTSE100 has delivered around a 6% annually over the long term. It’s an impressive rate for a low-risk, diversified basket of stocks, but its not going to transform your wealth anytime soon.

Stock pickers recognise that and knowingly take on more risk to accelerate the growth of their savings. Today I’m going to explain why Reckitt Benckiser (LSE: RB.) and Unilever (LSE: ULVR) are unlikely to beat that 6% total return over the next few years, in spite of their ‘safe-haven’ status.

In fact, that’s half the problem and you’d be better off buying the FTSE.

Dividend Distractions

Anyone who keeps half an eye on the bond markets will have noted the historically low yields on offer in recent years.

Low bond yields force investors to’reach for yield’ by investing in riskier or pricier prospects (including stocks) to fulfil their income needs. In my opinion, low yields have pushed these investors towards consumer goods giants such as Unilever and Reckitt, running up the share prices.

This makes a lot of sense. These companies sell an incredibly high volume of small-ticket items under dominant brands, which results in consistent sales and cash generation. Plus, we tend to buy toothpaste, deodorant and other such products no matter what the economy is doing.

These defensive qualities appeal to those desperately scrabbling for income, but since the US voted for Trump, bond yields have been climbing rapidly. The yields on even safer vehicles have resulted in a flight of capital out of consumer goods giants and back to the credit markets.

The Fed recently announced the first interest rate rise of the year (and only the second in the past decade) and has predicted further hikes in 2017. If they come to pass, those rate rises will drive bond yields higher still and even more investors will dump so-called safe-haven shares.

Steep price for a cheery consensus

While it’s true that both Unilever and Reckitt are great businesses, it’s also true that this is no secret. Investors and analysts alike have long-championed these companies as suitable core holdings. The underlying businesses are wonderful, I agree, but investors are likely to earn sub-par returns based on current prices.

Unilever trades on a PE of 22 and Reckitt on a PE of 28, which in my opinion is far too high considering lacklustre growth. Reckitt has only grown earnings per share by 1.6% since 2011, while Unilever has barely grown earnings since 2013.

There are short-term headwinds facing these businesses too, including weak sterling that will likely increase the cost of importing raw materials.

These factors could place significant downward pressure on the share prices of these widely-loved companies. Investors would therefore be better served by sitting on their hands and waiting for a better entry point than the 2.7% and 1.9% yields on offer at Unilever and Reckitt respectively. At the very least, I’d expect these companies to yield significantly more than the FTSE 100’s 3.8% before considering a purchase.

The post Why I’m not buying Unilever plc or Reckitt Benckiser Group plc…yet appeared first on The Motley Fool UK.

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• Value investors: Unilever shares are down 7% in a day!

Zach Coffell has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Clearly, holding some bonds within a portfolio is generally a good idea. They have much lower risk profiles than shares since a lender ranks higher in case of default than an equity holder. They also help to diversify a portfolio and offer a counterweight to falling share prices if market uncertainty increases.

Furthermore, bond prices tend to move in the opposite direction to interest rate changes. For example, in a falling interest rate environment bond prices usually rise to offer lower yields. With the Bank of England adopting a dovish policy and likely to reduce interest rates before it increases them, bond yields could fall and bond prices may rise. This could lead to capital gains for bondholders.

However, the reality is that bond yields could also move higher as a consequence of Brexit. That’s because confidence in the UK economy is now lower than it was before the EU referendum. Therefore, investors may view the UK government as a less secure borrower and government bond prices may fall. This could lead to capital losses for bond holders, since confidence in the UK economy may fall as negotiations surrounding Brexit begin to take place in 2017.

UK uncertainty

Of course, UK-focused shares also offer a rather uncertain outlook. UK GDP growth is forecast to be exceptionally low in 2017 and unemployment is expected to rise. This could lead to difficult trading conditions for UK-focused companies. As such, some shares could fall over the medium term. However, in many cases they offer a wide margin of safety and so the problems associated with Brexit may already be priced in. Therefore, their performance over the medium term may be relatively strong.

One impact thus far of inflation has been a weaker pound. This has caused inflation to increase to 1% and further rises are likely. The Bank of England has stated that inflation could surpass 3% over the coming years and it may be forced to retain a low interest rate to support economic growth. In this situation, the return on bonds could be negative in real terms. By contrast, the FTSE 100 yields around 3.6% and also has capital growth potential. Therefore, shares could be a better means of maintaining and even growing purchasing power over the medium term.

Beyond holding bonds as part of a diversified portfolio, there seems to be little reason to sell shares in order to buy them. Yields of 1.1% are still historically low, while a FTSE 100 yield of 3.6% is relatively high. As such, buying shares rather than bonds seems to be the best move at the present time.

The post Do Brexit fears make bonds a better buy than the Footsie? appeared first on The Motley Fool UK.

More reading

• Prediction: by December, £5,000 invested in UK shares will be worth…
• easyJet shares plummet 30% in 3 months! Is it now a top stock to buy?
• Forecast: in 12 months, a £5,000 investment in BP shares could be worth…
• Prediction: 12 months from now, £5,000 invested in Shell shares could be worth…
• Get ready for Nvidia stock’s next move higher