A stock market crash could be on the horizon, but bear markets present investors with opportunities as well as challenges.
Here’s how I’d invest £1,000 if share prices tank.
Defensive shares
Defensive stocks would be my first investments in a stock market crash. They’re more likely to deliver stable returns and reliable dividends during turbulent economic times. This is where the FTSE 100 index showcases strength with a wide selection of defensive equities among its constituents.
I’m particularly drawn to utilities stock, SSE (LSE: SSE). The energy company marries a cheap price-to-earnings (P/E) ratio of 7.82 with a respectable 4.27% dividend yield. An attractive combination.
Shareholders may be concerned by Treasury plans to impose a windfall tax on electricity generators’ £10bn excess profits, including wind farm operators. This is a potential headwind to further growth in the SSE share price, which is up 25% over 52-weeks.
However, the policy’s precise impact remains to be seen. On balance, I think this stock could be a good buy for me in a stock market crash.
I’d also seek to diversify my defensive stock purchases into other market sectors. For example, drinks giant Diageo (LSE:DGE) is a Footsie stalwart that’s significantly surpassed its pre-pandemic high. The Diageo share price is down 11% this year. Further selling in a stock market crash could present an attractive buying opportunity in my view.
The company’s consistently distributed dividends to shareholders for over two decades, even throughout the Global Financial Crisis. Coupled with an impressive history of index-beating returns, I regard Diageo shares as quality investments despite the expensive P/E ratio of 28 that represents a risk.
Growth stocks
It’s harder to identify growth stocks I’d buy without knowing the dynamics of the next stock market crash. But bargains can always be found amid the chaos of a bear market. I’d devote a portion of my total investment to snapping up cheap shares with strong growth potential.
One candidate I have my eye on is FTSE 250 tech stock Kainos (LSE: KNOS). The Belfast-based business specialises in digital transformation, counting the NHS and Home Office among its clients. Kainos also partners with Workday on consulting and software solutions.
The Kainos share price has taken a beating this year — it’s down 31.5%. The stock also isn’t cheap at a P/E ratio of 38.48, which again, is a risk. However, Kainos recently posted encouraging financial results for FY22. Revenue was up 29%, breaking the £300m barrier, and the company posted a 3% uptick in adjusted pre-tax profit.
I view any further heavy selling in Kainos shares as a gift to establish a position in a company with a bright future.
Why I’m not worried about a stock market crash
Bear markets form a natural part of the boom and bust cycle. Past performance doesn’t guarantee future results, but patient investors have been rewarded historically by adopting a long-term buy-and-hold approach.
If the stock market crashes, I’d invest £1,000 into a blend of defensive stocks and beaten-down growth stocks with a view to securing good returns in years to come. Bargain hunting when stocks go on sale is one reason I maintain a healthy cash position in addition to the peace of mind during periods of elevated share price volatility.