Markets have been frenetic this week. Many investors feel increasingly jittery about share price movements. Nobody knows how the stock market will perform in future. But I do have a plan for how to react to a stock market crash, whenever it might happen.
Here are the key elements of my crash plan.
Be prepared
If a stock market crash comes, I may want to invest more money. But the window for action can be short. In March last year, for example, many shares crashed but started to recover within days. I was eyeing Howden Joinery, but within a few days of tumbling it was moving rapidly upwards again.
So I find it helpful to have a watch list of stocks I find attractive. That way, if the stock market does take a dive, I can immediately know where to focus my attention.
For example, Unilever is a company on my watchlist. If it fell as part of bigger rout, I would consider adding more to my portfolio. There is a risk an economic downturn could force consumers to trade down from premium brands, cutting Unilever’s profits. But in the long term, I see strong potential in its diversified portfolio and exposure to developing markets.
Stay calm
Even a wobble in share prices can be stomach churning for many investors. A stock market crash can cause panic to set in. Panic makes for poor decisions.
When the markets are tumultuous, keeping a calm head enables me to react rationally and logically. For example, last year as Exxon plummeted, I thought about cutting my position. With the oil price down, I watched as the shares lost half their value in just a couple of months. But I considered my investment thesis about Exxon and decided that it still stacked up. I stayed calm, and didn’t sell.
There are still risks: oil prices could fall again, for example. But staying calm helps me to focus on my investment analysis, and assess such risks.
Focus on quality
Stock market crashes are inevitable from time to time, just like stock market bubbles. I don’t spend lots of effort trying to time the market. Instead, I try to focus on identifying companies whose ability to generate cash is likely to survive a tumble in its share price.
For example, Safestore has a strong brand and a simple business model. It could benefit from rising housing costs if people moving to smaller homes store belongings elsewhere. That said, even with these characteristics, the share price may be buffeted by a stock market crash. I’d also weigh risks, such as growing competition exerting downward pressure on profit margins.
Whatever the broader stock market was doing, I’d consider buying a company like Safestore. If anything, a crash pushing its price down would only makes it more attractive to me.
Staying diversified
A key part of my risk management approach is to limit my exposure to any one share or sector.
Sometimes that can seem frustrating. I miss out on additional returns from a share or sector that is hot. But a stock market crash reminds me exactly why I choose to diversify.
Holding a range of companies across different industries, I pay less attention to wild swings in any one share price. That helps me sleep more easily.