Talk of a stock market crash is in the headlines again.
Fears of a US recession have knocked the Nasdaq index down 13% from its 52-week high, as I write on 6 August. That’s technically a correction (which is at least a10% fall), if not a crash, which needs a drop of 20%.
In Japan, the Nikkei 225 fell 12% on 5 August, for a correction in one single day. Still, as I write the following day, it’s back up 10%. But it’s still down 18% from its July high, so we’re bordering crash territory there.
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Meanwhile, our own FTSE 100 briefly dipped back below 8,000 points, though it’s just above that level as I’m writing this.
It’s been a traumatic week. And it’s still only Tuesday.
Build some crash barriers
How can we buffer our investments against a stock market crash? We may or may not be in for one now. I very much doubt it myself, with the cautious Bank of England having been convinced to make its first interest rate cut.
But there will be another slump some day, that’s about as close to certain as anything in the stock market.
And that knowledge alone is enough to tell me one thing. I need to hold some defensive stocks. Look at Unilever (LSE: ULVR), for example.
Look at the long term
The FTSE 100 has fallen, yes. But all that means is that it’s only up 3.3% so far in 2024, when a week ago it was up 8%. So not actually a loss at all.
Unilever, though, is up 25% year to date, even after a modest new dip. The share price is only back where it was a week ago. The Footsie, meanwhile, has fallen to April levels. Still not a disaster though.
Admittedly, Unilever has been through a tough patch of its own, down 3% in the past five years. And I see more uncertainty as the firm works to refocus on key brands.
But look back at the longer term, and the share price has more than quadrupled since the start of 2000. The FTSE 100 is up just 15% (but it did start the century with the dotcom bubble bursting).
Keep three things in mind
So, how should we prepare for the next stock market crash, whether it’s this week, next year, or in a decade’s time?
I have three key steps. First, keep my stock market investments diversified. That should ease the pain of a single sector slump.
Then, buy to hold for at least a decade. We’re only a few years on from the 2020 crash that caused so much panic. Yet the UK stock market is already well ahead of where it was before Covid.
If we don’t plan to sell our shares next week, why would it matter if prices fall this week?
Let’s all be like little Buffetts
Who did best out of 2020? That’s right, the investors who bought when prices slumped. Not the ones who sold up and realised big losses.
Talking about market downturns, Berkshire Hathaway investing guru Warren Buffett famously said:
Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.
Letter to shareholders, 2016
When stock markets crash, that’s when it rains gold.
