Many investors are now worried about the threat of the second stock market crash. That is understandable, as Covid-19 has yet to be defeated. Even if we avoid a second wave, the global economy is still falling into the fastest recession in history.
In fact, it is amazing that the FTSE 100 and other indices have not crashed already. However, there is no need to panic. A stock market crash is not the end of the world. Far from it. History shows that share prices always recover, given time.
The following three steps should help your portfolio survive, even if share prices do crash again from here.
1. Stay calm, it will pass
Seriously, there is no need to panic. A stock market crash is a natural occurrence. They happen all the time. The pandemic may have taken us into new territory, socially, politically and economically, but markets are doing what they always do. They are reflecting how investors see the future.
In that respect, they are relatively optimistic. They have seen central bankers and governments rush to the rescue with unprecedented fiscal and monetary stimulus. They believe that will support asset prices, and I’m sure they are right. You can argue whether that is right or wrong, but it certainly takes the edge off current worries.
2. Do not sell if stock markets crash
There is one thing you should not do if share prices crash. Sell. That will only turn your paper losses into real losses. You will then face a tough decision. When to buy back into the market? You will almost certainly miss the early stages of the recovery, as they happen faster than people expect. Just look at April’s rebound.
While stock markets are volatile in the short run, they deliver superior returns to almost every other asset class in the longer term. That is why you need to stick with them, through thick and thin. Keep reinvesting any dividends you receive as well. They will pick up more stock, at stock market crash prices. Markets will recover. They always have in the past.
3. Carry on investing
Some see a stock market crash as a threat. Experienced investors see it as an opportunity. This is your chance to pick up dirt-cheap FTSE 100 stocks at reduced prices. Look for companies with strong balance sheets, loyal customers, healthy cash generation and minimal debt. That would suggest they have the strength to see through the current crisis. Especially if they can still pay dividends.
The aim should be to hold the stocks for 10, 20, 30 years or longer. If you do that, today’s stock market crash will be forgotten by the time you retire and start to generate income from your portfolio.
There will be further stock market crashes in future. There always will be. This three-step recovery plan should help you survive those as well.
