If there was any chance of falling into complacency regarding stock market movements recently, last Thursday shook that completely. Major global stock markets plunged between 3% and 7% on the day, with the FTSE 100 index not immune. The rising calls of another stock market crash have gathered pace in recent weeks. The disconnect between the stock market and the real world is being flagged as worrying by some leading investors.
So as an investor, what should I do? The crash appears to be coming, but at the same time it hasn’t arrived yet. In a similar way to protecting a house with a looming storm on the horizon, preparation is key!
The checklist
- Check what liquidity you have. You don’t want to get into a situation where there’s some great oversold stocks to buy, only to find out you’ve no money to buy them with. Or you may have funds, but not in a liquid form. To avoid missing the boat on another stock market crash, check where/what funds you have available now.
- Review the cash returns. For funds that you currently have sitting in cash, check what return you’re getting. Even within a Cash ISA, it’s likely to be low. So if an opportunity arises, you know which money can be used to invest as it’s currently not making you much. It’s a low opportunity cost.
- Make a list of stocks you like. The first stock market crash this year saw markets bouncing back fairly quickly from the lows in the middle of March. You won’t be able to time it perfectly, but at least take some of the time out of analysing the stock you want to buy before any crash happens. This’ll allow you to move quicker when needed.
- Do some charting. Look at the FTSE 100 index over several years. At what level would you be happy to buy for the long term? 6,000? 5,500? Making a call now is much easier than trying to pick an entry level in the heat of the moment.
- Check dividend payouts. If you’re looking to invest for income, check now on the status of any potential dividend payments from Q1 trading updates. You don’t want to end up buying into a firm, only to later realise it had cut the dividend already.
- Flag your ‘at risk’ stocks. You’ll likely have some volatile stocks that will be exposed to a second market drop. Make sure you’ve a close eye on these.
- Work out your strategy. History tends to show that averaging-in your purchases of stocks over different days/weeks is better than buying all in one go. But you’ll also need to think about not trying to average-in over a long time (like once a quarter) as you may miss out on the opportunity all together.
Stock market crash-ready
If you fail to prepare, then prepare to fail! In the above case, not preparing will mean you miss out on potential profits from a second market crash. We may not have a second crash, but at least by preparing now you can be in the best position to make a move if we do see it, or even if stock prices simply continue to be volatile.