I think the most important part of an investing strategy is to focus on minimising your potential losses. That’s obviously not a new idea, and it’s been pioneered by Warren Buffett for decades with his famous “Never lose money” rule.
I’ve seen investors who’ve made big losses. They’re mostly folk who’ve piled large amounts of money into hot growth stocks. They’re after big profits, quickly, and that brings big risk. Then there are investors who have made millions. They’ve often invested in safe dividend stocks and reinvested all their dividends. Oh, and they’ve left the money invested for decades.
Estimates suggest there are around 200 ISA millionaires in the UK. Most of them probably started with PEPs, and again it’s taken them a long time. But becoming a millionaire warrants a bit of patience in your investing strategy, surely.
Too late now?
What’s the use of all this now the FTSE 100 has crashed and you might have already lost a bundle? Well, investing shocks like this can give us the boost we need to rethink our investing strategy and prepare for future downturns. There might not be another stock market crash for decades. But, then again, the current one is not over yet. And it might even get worse before it gets better.
My Motley Fool colleague Paul Summers has examined a few reasons why we might see a further painful dip. We’ve had a bit of excitement with the partial relaxation of Covid-19 lockdown rules. And that could turn into euphoria when we reach the endgame. But I do think a lot of people are underestimating the long-term economic impact. When it becomes clear, I reckon there’s a good chance of a further downturn.
My investing strategy
I say we should prepare for the next stock market crash now, whether it happens later this year, next year, or not for another couple of decades. I’m adapting my investment strategy in three key ways.
Firstly, I won’t ever again invest in companies with very high net debt and high operational costs. I’ve made that mistake before, most recently buying Premier Oil shares. But thankfully I did sell those before Covid-19 arrived. I’m raising the priority of the balance sheet in my investing strategy now.
Secondly, I’m going to think more about buying the in-between operators rather than companies at the sharp end of risky markets. What do I mean by that? As an example, I’ve never bought any airline shares, but I would buy Rolls-Royce as a supplier of engines for many of the world’s fleets. I intend to extend that kind of thinking.
Perhaps even safer
Thirdly, I’ve never actually bought any ultra defensive stocks. But look at Tesco. Sure, there’s plenty of competition, but food is an absolute essential. The Tesco share price has fallen by only around 10% so far this year, better than any of my current holdings. So that’s another approach to modifying my investing strategy.
But the one part of my strategy I’m never going to change is to keep investing for the long term. That is by far the best way to recover from short-term market crashes.