Since its low point in the middle of March, the stock market has continued to rise. This is despite the dire economic news and the overall impact of the pandemic on many businesses. For example, in April, UK GDP shrank by a record 20.4%.
On the other hand, in the same period, the FTSE 100 rose by around 12%. This indicates over-optimism in the market. There’s also the possibility of a second wave of coronavirus, with the World Health Organisation recently reporting record increases of Covid-19 cases. With all this news, it therefore seems prudent to prepare for a second stock market crash. Here’s what I’m doing.
Invest in defensive stocks Â
The possibility of a stock market crash doesn’t mean I’m not buying. Instead, it’s just important to be discerning when picking stocks. At this moment, I would argue that defensive stocks are the best option. These often pay a stable dividend and maintain stable earnings throughout a downturn.
I recently wrote an article on defence specialist BAE Systems. This FTSE 100 firm has seen little impact from the pandemic and is in a strong position to capitalise on the current geopolitical tensions worldwide. This is therefore a defensive stock I would add to my portfolio now, especially at its current price. I also believe that Unilever is in a strong position to cope with another stock market crash. With significant brand loyalty and a huge number of different products, it consistently achieves strong sales. As a result, I believe that it should cope well in the case of another crash.Â
Keep spare cash for a stock market crashÂ
As well as buying defensive stocks, I’m also ensuring that I have some spare cash. The first stock market crash in March produced many bargains, and since this point, some stocks have doubled or even tripled. As a result, it’s important not to miss out on another crash. In order to raise this cash, I’ve personally sold part or all of certain companies. This has included selling all my easyJet shares and reducing the number of shares I own in Barclays. These stocks have seen monumental growth since their recent lows but are also very exposed to another downturn. Not that I’m suggesting you go sell crazy. Here at The Motley Fool we like to hold for the long term and really back our winners.
Ensure companies have a strong balance sheet
It’s important to note that the current buoyancy may continue, and a stock market crash may not be imminent. In this respect, I am still holding on to some of my ‘riskier’ stocks, that have been severely affected by the pandemic. But it’s important that these stocks have strong balance sheets, which should ensure a strong recovery. For example, I own shares in both Aviva and On the Beach. While both are exposed to downturns in the stock market, a lack of debt and large amounts of cash should help limit the damage in the event of another stock market crash. I am therefore not selling these stocks and will happily buy more if they decline further.