With the 2020 stock market crash in full flow, there are three major decisions I’m taking to protect my future wealth.
Stockpile cash
Sitting on your hands is never easy as an investor. P/E ratios — a measure of fair value — are falling through the floor. Shares that were trading a 30 or 40 times last year’s earnings are now at 15 or 20. You see prices falling and think, “It’s a fire sale! Time to click the buy button!“
But wait. I think this market has further to fall. To paraphrase crisis analyst Michele Wucker, the coronavirus is not a black swan event. It’s a grey rhino. Highly visible, coming straight at us and about to smash everything in its path.
I’m not selling the high-yield FTSE 100 companies I’ve held for years. That would undo all the compound gains I’ve worked so hard to protect.
I’m still drip-feeding spare cash into my Stocks and Shares ISA. But instead of piling into high-growth shares I’m watching and waiting.
Yes, I might lose out on the slim possibility of gains from some risky bargains. But I’m more likely to make profits based on facts, not blind luck. I’m not trusting my family’s future to blind luck.
Refine your watchlist
We’ve just seen Donald Trump ban most visitors from flying to the US from Europe.
We’ve just seen Italy lockdown its entire 60 million population. Governments are closing schools, pubs, restaurants, and banning the public from sporting events and large gatherings. If some haven’t done it yet, they will do soon.
Clearly travel companies, hospitality and tourism businesses, and airlines are going to be decimated. That means the likes of IAG, TUI, easyJet and cruise operators like Carnival will fall further.
Sales and profits will be badly hurt. And as share prices plummet, dividend yields rise.
Companies that are holding lots of debt that also pay out a large proportion of their earnings will have to cut their dividend. It’s inevitable. I’d steer clear of businesses with low dividend cover. That’s the number of times that dividend payments are covered by earnings.
There are sectors that are more recession-proof than others. Healthcare is one of them. Drug development companies will become ever more important in the months and years ahead. FTSE 100 pharma companies like GlaxoSmithKline, with its strong economic moat and unimpeachable trademarks and patents would be one of my top picks.
Think long term
One of the most sensible (if slightly terrifying) things I’ve read recently is that the market bottom — where stock prices start to turn around — will only come when investors lose all hope.
But if you are truly investing for the long term, getting caught up in the panic does not help. Zoom out to look at the bigger picture and you are more likely to profit. So making the occasional buy on stock market down days will still yield positive long-term results.
Some businesses could disappear in a puff of smoke. Be smart. Choose wisely. And watch closely.