Fears of a stock market crash are rising. Investor Bill Ackman has drawn comparisons between the recent collapse of SVB Financial Group and Bear Stearns, the first US lender to fail in the 2007-08 financial crisis.
Counterintuitively, this could be a positive development for my Stocks and Shares ISA. Although I don’t want a stock market crash to materialise — few investors do — I’m preparing for one.
Here’s how.
Why a crash could happen
Stubborn inflation, possible recessions, and now the spectre of financial contagion from the implosion of Silicon Valley Bank. There’s a long list of factors that could send global share prices plunging.
I don’t have a crystal ball, so I can’t predict exactly what will happen — or even if there will be a crash at all. However, hopes of a new bull market for the S&P 500 are fading and, closer to home, the FTSE 100 could become a victim of a downturn across the pond.
The old adage “when America sneezes, the rest of the world catches a cold” could prove true in 2023. There’s a good chance we haven’t seen an end to the selling across many areas of the stock market.
Short-term pain for long-term gain
So, what does this mean for my portfolio?
I own a variety of shares but I don’t plan to sell my existing holdings. That’s because I’m a long-term investor, focusing on my returns many years from now rather than over the coming months.
That said, a stock market crash would inevitably reduce my portfolio’s value.
I’m comfortable with that. Market timing is difficult and I don’t want to sell my stocks in a vain attempt to re-enter my positions at lower prices. In doing so, I risk missing out on surprises to the upside — and, indeed, I’m bullish on my holdings (I wouldn’t have invested in those stocks otherwise!)
However, I’m concentrating on building up my cash pot too. A sizeable cash position allows me to capitalise on any big dips in shares on my watchlist with a view to securing long-term returns for my ISA.
After all, Warren Buffett’s Berkshire Hathaway currently holds a massive $128.7bn in cash. When the Oracle of Omaha devotes such a big proportion of his portfolio to liquidity, it’s worth taking note in my view.
Stocks I’d buy
There are plenty of shares on my watchlist that I’d invest in during a severe downturn. For example, defence contractor BAE Systems is one.
The shares look expensive to me at present after climbing 29% over the past year. This has pushed the price-to-earnings ratio up to nearly 18.5. But if the company was caught up in a broad market sell-off, I’d enter a position.
In addition, Berkshire Hathaway itself is a stock I own. I’d gladly take advantage of any opportunity to reduce the average cost of my shareholding despite some lingering concerns I have about the company’s future without Buffett at the helm.
Overall, if a stock market crash happens, that means shares are on sale. As an investor with an optimistic view of the market’s long-term future growth prospects, I’d take full advantage by filling my ISA with cheaper shares.
