With growing geopolitical tensions abroad and record-high interest rates at home, the prospect of a stock market crash is looking more probable for some. In fact, even industry titans like Jeremy Grantham have been warning investors that a catastrophe could be on the horizon.
Personally, I remain unconvinced that the stock market is headed for Armageddon. While there are some concerning factors to watch, history has proven the stock market to be far more resilient than most would believe. Having said that, I could be wrong. That’s why I’ve already found it prudent to hope for the best but always prepare for the worst.
With that in mind, let’s explore some strategies to cope with potential future turbulence within the stock market next year.
Build up some dry powder
Despite not generating the best returns, holding cash can be a brilliant move for tackling market disruptions. Even when it comes to rising inflation, cash tends to outperform other asset classes in the short term. But, most importantly, it provides flexibility.
Let’s assume a crash happens, and an investor’s portfolio drops as much as 40%! Providing that the portfolio contains high-quality enterprises, these investments would likely eventually recover before achieving new heights. However, this process could take several years. And one of the worst positions an investor can find themselves in is being forced to sell stocks at terrible prices in order to pay the bills.
The best way to avoid such a scenario is to build an emergency fund. This cash buffer exists to supply money to cover living costs should a regular income stream become disrupted. And the odds of needing one could be quite high if bearish predictions of an economic collapse come true, since a lot of people would likely lose their jobs.
This cash buffer also acts as a source of capital once the dust has settled. There will be a lot of stock trading at discounted prices. And investors with the funds to capitalise on these opportunities could achieve stellar returns in the long run.
Look at the business, not the stock
Seeing a company’s value jump off a cliff is tough. And it may be tempting to sell the shares promptly to avoid further losses. However, in many cases, this is a classic rookie mistake.
In the short term, stock prices are driven by mood and momentum. And during a stock market crash, pessimism often reigns supreme. As such, even if a stock falls by 30%, 50%, or even 70%, it might be far wiser to start buying rather than selling.
Volatility is the price every investor has to pay, especially when hunting for high-growth investments. But fluctuating share prices can be massive distractions to what ultimately matters – the business. A company may be suffering from short-term disruptions. But if the long-term strategy remains intact, the volatility caused by a crash may have created amazing long-term buying opportunities.
In short, the best way to prepare for a crash is to hoard cash and be eager to snap up the bargains created by other panicking investors.
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