There are plenty of potential known, or currently unknown, catalysts for a stock market crash. From a worsening of coronavirus through to an ending of central bank action to prop up economies, plus geopolitical concerns and wars. There’s always something to keep the investor up at night – if you let these things bother you.
I prefer to take little notice of the news. I want to buy great companies which make profits and cash and hold them for a long time. That way I think I can weather any stock market crash.
So, without further ado, here’s how I’ll invest to limit the downside and protect my money in any future downturn.
Build the house on solid foundations, not sand
To build a great house that’ll stand the test of time, you need solid foundations. A shares portfolio also needs to have solid foundations in the form of a strategy and an edge. The latter can be achieved by focusing on an industry you know well, or by becoming an expert at value investing for example, or growth investing.
From my point of view, solid foundations come from having shares which produce an income in the form of dividends. The dividends received can be reinvested in more shares. This creates a spiral of growth which is called compound interest. This approach I believe works after a stock market crash. Having no strategy or direction is like building a house on sand. It won’t last and you’ll lose everything.
Take a long-term view: invest with knowledge and confidence
To have a strategy will require you to think about your investing style, objectives and plan. With this in place, you can invest for the long term and make better, more profitable decisions. With improved planning and decision making, you can invest with knowledge and confidence. This will insulate you when markets sour – as they occasionally do.
Taking a long-term view allows you to look past short-term problems and challenges. These can come in the form of company-specific problems, or the background noise of economic updates and the forecasts of others.
Diversify to limit the impact of a stock market crash
Another aspect is to build a diversified portfolio. I aim to make sure some of my portfolio is defensive in nature. In practice, this means including companies that can survive –and possibly thrive – in a stock market crash. Examples include supermarkets, pharmaceuticals and utilities where demand doesn’t dry up when consumers or governments are short of cash. Or at least demand doesn’t go away to the same extent as it does for luxury goods or cars.
Given another stock market crash is almost inevitable, I think it’s best to have a balanced portfolio which looks to include both income and growth. If you plan for the worst and take a long-term view, then I think you can position yourself well to profit from any market downturn.
