There were some gloomy economic predictions for the British economy this week. Investment bank Goldman Sachs warned that UK inflation could jump 22% by winter if gas prices remain elevated. This high inflation would likely push the economy into a recession. When hearing such a dire forecast, it’s only natural to wonder whether we’re about to witness a stock market crash. Here’s how I’m processing all of this.
Inflation and the stock market
To keep price rises stable, the government sets the Bank of England an inflation target of 2% a year. This stability helps businesses and consumers plan for the future. Stock markets tend to like this level of predicability when it comes to the economy and company earnings.
If inflation does jump 10 times higher than this 2% target, then clearly the UK economy is in for a rough ride. Consumers will likely cut back on spending, which would hurt the earning potential of companies. The stock market will likely fall to reflect this decline. It could even crash.
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So, what should I do (if anything) to prepare my portfolio for this possibility?
The long game
One of the most important lessons I’ve learned as an investor is to always remember the game I’m playing. There are many strategies and games being played each day in the stock market. There are day traders, speculators, hedge funds, and robot traders that buy and sell thousands of stocks per second.
I like to use a football analogy when thinking about this. Imagine there’s one giant pitch (the stock market), and there are thousands of different games of football being played on it at the same time. Professional, amateur, five-a-side, futsal, penalties, and so on. Every player is trying to win (make returns) within their own game.
However, most of these players are not playing my game, which is long-term investing. I have a different time frame to these other investors, yet we’re all on this same pitch that is the stock market. So I need to know which game I’m playing, and stick to it.
Success is where preparation and opportunity meet
To me, being long term as an investor means not being scared into selling my positions when economic downturns affect the market. I try to remind myself of this as much as possible, especially when markets tumble. It really helps me stay focused on my long-term plan of slowly building wealth over time.
Obviously it wouldn’t be nice to see the value of my portfolio fall if the market crashes. But I’ve built some cash reserves up so I’m not forced into selling my shares at lower prices.
I’ve also made a list of great companies I’d like to own if their shares went on sale during a crash. These include British drinks giant Diageo and Watsco, the leading HVAC distributor in America.
Ultimately, nobody knows for certain when a stock market crash will happen. If it’s this winter, then I’ll use it as a buying opportunity to add more shares to my portfolio.
