Across social media and traditional news outlets, stories of a market bubble and possible stock market crash are popping up with increasing regularity. In the face of all this noise it can be hard to know what to do. As a dedicated long-term investor, I’ll remain invested in good companies despite increasing fears, while keeping a sensible amount of cash in reserve. For me that’s about 10% of my portfolio. However, there is no right or wrong amount, that’s just what I feel comfortable holding as cash.
The possible warning signs of a stock market crash
Special Purpose Acquisition Companies (SPACs), increasing numbers of first-time investors, new reporting metrics by companies and analysts, increasing amateur day trading and the rapid share price increases of tech stocks are all possible warning signs of a stock market crash. Certainly some of the optimism and the behaviour in the market is concerning for me.
However, irrational exuberance can go on for a long time and there’s nearly always some level of fear about a stock market crash. That’s why I’ll keep one eye on the market as a whole, but focus my energy primarily on picking good stocks that fit with my investment strategy.
I believe the best investors typically spend most of their time buying great companies at a fair price. That’s what I intend to do, so despite the stories of a stock market crash I’ll keep buying shares – albeit cautiously and hopefully sensibly.
At the end of the day, predicting exactly when a crash will happen is near impossible. Just ask any economist in 2009. Or indeed most people in January 2020.
For me the way I want to build my wealth through the stock market is long term. By taking a long-term view of things I can ride out short-term market corrections without losing too much, or panicking.
Investing defensively when valuations are stretched
In some industries it’s possible valuations have become stretched as investors rush into the latest exciting new trend. Renewable energy and hydrogen are potential examples. That said, share prices in those industries could of course continue to rise if demand continues. If the market does crash though, those shares, where valuations are quite high compared to the actual financial performance of the business, are likely to be hit the hardest.
To achieve a reasonable balance between protecting my money if markets turn down and actually making money from shares, I intend to buy shares that provide growth at a reasonable price. I’ll also add some higher yielding shares, especially those with defensive characteristics. That’s those companies where demand traditionally trends to hold up no matter what’s going on in the economy. Think industries like supermarkets, tobacco, and so forth.
As fears of a stock market crash circulate I’ll be focusing on my stockpicking. That means buying good companies at a fair price, keeping some cash in reserve, and thinking about my long-term plan.