Will there be a further stock market crash in 2022? My Motley Fool colleague Cliff D’Arcy has warned us of some early signs to watch out for, though he doesn’t seem too pessimistic. And, well, when investors are keeping their eyes peeled for a crash, that’s usually precisely when one doesn’t happen.
No, stock market crashes tend to come along when we least expect them. But that doesn’t mean we should be complacent as 2022 progresses, as the world faces plenty of economic pressures. Here’s how I plan to minimise any possible downside in my investments this year.
Firstly, being poorly diversified left me more open to the 2020 crash. I was disproportionately invested in financial stocks, with holdings in banking and insurance. My investments have always favoured the financial sector, but this time it really left me open. One of my favourite stocks, Lloyds Banking Group, tanked. And it had made up around 20% of my portfolio at the time.
Over the past couple of years, I’ve improved my diversification. I now have some of my funds in a widely-spread investment trust. And I’ve also gone for consumer goods giant Unilever. I’m always wary of diversifying just for the sake of it and ending up with less attractive selections. But these are two I like on their own merits.
Don’t play a stock market crash
If we do face another crash, I’m going to avoid any temptations to play it. What do I mean by playing the crash? I mean I’m not going to pile into a company just because its share price has fallen. I think International Consolidated Airlines is a good example. About a year ago, a lot of investors got back into the stock, seeing it as an attractive recovery candidate. The company had successfully refinanced, and had plenty of liquidity (albeit with heavy debt). But it was clearly too soon, and despite early 2021 gains, the IAG share price headed south again.
At the same time, I will try to avoid moving into stocks that appear crash-resistant. Why is that bad? Well, by the time a stock market crash is upon us and I work out which stocks might be resistant — everyone else has too, and the prices have already climbed. As we have seen, that’s a short-term response, and they tend to fall back when the crash recedes. That brings me to a wider rule that I want to follow.
Don’t play the voting machine
I keep being drawn back to Benjamin Graham’s famous assertion that in the short run the market is a voting machine, but in the long run it’s a weighing machine. Throughout the crash, share prices were being driven by short-term investor sentiment. That’s the voting machine. And the weighing machine that evaluates the long-term prospects of the underlying companies was temporarily out of action.
So in any future stock market crash, I intend to ignore any short-term movements. And I’ll try not to buy anything unless there’s reasonable visibility of long-term valuations. In the meantime, I might pick up some more Lloyds shares.