I’m being very careful with my Stocks and Shares ISA at the moment. I think that the recent rally in share prices is going to prove short-lived and that stocks have some way to fall before the next bull market.
In order to set myself up for the possibility of a stock market crash, I’m looking to do two things. The first is to be disciplined about how often I’m adding money to my ISA. The second is to make sure that I’m buying stocks at prices that I think are attractive.Â
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Adding money
The first part of my plan involves being disciplined about depositing cash. In general, I try to follow Warren Buffett’s advice and add money to my account at regular intervals throughout the year.
This can be difficult to do when share prices move downwards. For me, it can be easy to add money too quickly because stocks are cheaper than they were last week or last month.
The trouble with doing this is that shares might just become even cheaper! If I add extra money in September to take advantage of lower prices than August and the market is even lower in October, I’ll have made a bad move.
Buffett recommends that most investors add money gradually because nobody really knows when the stock market will reach its lowest point. But by investing gradually, I can make sure that I have money to invest whenever that is.
Share prices
A sudden fall in share prices won’t be a problem for me as long as I’m able to wait for them to recover and be confident that they will. But this relies on me not overpaying for the stocks I own in the first place.
For example, I’m looking at buying shares in Diploma for my portfolio at the moment. I think that the underlying business is tremendous and I’d love to own the stock.
In my view, though, the Diploma share price is a bit too high. The stock currently trades at around £25 and I think that its fair value is closer to £20.
If I buy shares at £20 and the price falls sharply, then I can be confident that it will recover because that’s what the business (in my view) is worth. But if I pay £25 per share, then I can’t have this confidence – I never thought the shares were worth that, so why should anyone else?
That’s why being disciplined in buying stocks is important for me. As long as I’m confident that share prices will recover, I won’t need to sell my stocks while prices are low.
By doing this and staying disciplined about how much cash I add at a time, I think I’m putting my Stocks and Shares ISA in a position to survive a stock market crash.