One of the big challenges of investing is preparing for the next stock market crash. History tells us that the market has crashed roughly once a decade in the past 100 years.
Of course, this is not a fixed pattern. There is no telling when there will be another crash, and past performance should never be used to guide future potential.
However, how the market has behaved in the past is a warning to investors. We can never take the market for granted, and it is impossible to predict what is just around the corner.
Stock market crash catalyst
Right now, there are plenty of reasons to suggest a stock market crash could be on the horizon. Interest rates are rising, which will increase the cost of borrowing for corporations and individuals. Consumers and businesses may also reduce spending as prices rise, and company profit margins could take a hit.
On top of these factors, the cost of living is rising, hitting consumer confidence. And as interest rates increase, equities become less appealing compared to bonds, which could drive a rotation away from equities into other investments.
Put simply, it looks as if economic headwinds are building, and this is not good news for the stock market.
Nevertheless, as I noted at the beginning of this article, it is impossible to predict what the future holds. The stock market could crash tomorrow… or double over the next 12 months.
Over the past 10 years, numerous analysts have tried to predict the end of a bull market. They have all been wrong. Therefore, rather than trying to guess whether or not a stock market crash is just around the corner, I am trying to prepare for all eventualities.
Preparing for all eventualities
Rather than trying to time the market, I am focusing on buying securities that should be able to continue performing in all market environments.
A great example is Diageo. Even in a market crash, I think the sales of high-quality alcoholic beverages will hold up. This should ensure the underlying business continues to push ahead, even if investors start to flee.
Another example is the pension and long-term insurance companies Phoenix Group and Legal & General.
Phoenix manages old books of pension and life insurance policies. These should be relatively unaffected by any economic disruption.
While a stock market crash might impact the company’s balance sheet, management uses financial derivatives to try and limit risk (Legal & General is exposed to the same risk and uses the same risk management techniques).
Meanwhile, I think it is unlikely a market slump will significantly impact the sales of insurance and pension products Legal provides to its consumers.
I would buy all of these companies because I believe they have the qualities required to help navigate a stock market crash. Even if they may suffer in the short term, over the next 10 years, I believe they have bright prospects.