Nothing’s worse than a stock market crash for an investor. For those of us who’ve lived through one (or more than one), it’s a nightmare to wake up one day with much of your capital’s value shaved off. It’s tempting to cut our losses and run at such times, especially when we don’t know how much worse the situation could get.
But the depths of a stock market crash are almost never a good time to take the money and run. This is a point worth underlining at a time when speculation of a crash redux is rising. In fact, the contrary is true. In the words of legendary investor Warren Buffett, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”. I’m of the view that market crashes are such opportunities even if doesn’t appear so at the time.
Consider index funds and defensives in a stock market crash
If we’d like to invest at such times, but don’t know where, I think index tracker funds are the way to go. The FTSE 100 has risen by 23% from the lowest point of the crash. Even on average, the FTSE 100 index is 9% higher in June than it was in March.
We can also make relatively safe bets on individual stocks during a stock market crash. In fact, it’s possible that they’ll surpass index growth, which may be bogged down by other poorly performing stocks. Defensives are good buys during such times. These are companies that do well irrespective of how the economy is performing, yet their prices can weaken in the short term.
Consider the FTSE 100 pest control and hygiene services provider Rentokil Initial, for instance. Its financials have remained robust during the coronavirus crisis as its services are deemed essential. Despite this, its share price fell sharply during the stock market crash. It has bounced back since then, of course.
Cyclicals for the investor with risk appetite
As essential as it is to have exposure to defensive stocks in our investing portfolio, investing in cyclicals can reap rich rewards over the medium to long-term. They do require a higher risk threshold, however. easyJet is an example of a cyclical I’ve mentioned multiple times now. It was one of the worst hit stocks, but soon enough it was flying high, suggesting that cyclicals can offer short-term gains too. It’s not the only one though. Intercontinental Hotels Group and Carnival Corporation are other examples.
The only catch to cyclicals is that they need to be chosen carefully. For instance, I’m not convinced that Carnival can sustain its share price momentum, but I’m reasonably confident of easyJet. If our research and conviction are pointing in the direction of ‘buy’ and our previous track record gives us confidence in our calls, we may have a winner on our hands. And we don’t have to worry about a stock market crash redux then.