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Suddenly, everybody is talking about a stock market crash again. It happens every year, about this time.
There are plenty of reasons to be worried, as markets wake up to the fact that there will be no swift return to the days of near-zero interest rates. Rising oil prices and geopolitical worries aren’t helping either. The S&P500 has plunged and the FTSE 100 could follow if sentiment takes a turn for the worse.
These are troubled times
My biggest concern is that the world is sitting on a debt time bomb. The US is running up an astronomical $33trn pile that shows no sign of flattening, yet alone falling.
As a self-employed financial journalist, my investment portfolio will form the basis of my retirement income. I don’t want it collapsing in a crash. I therefore drew up a three-point plan years ago and, so far, its served me well. I’ll stick to it too, regardless of whether the stock market crashes in the weeks ahead, or surprises us by recovering.
Step 1: Always invest for the long term. I never buy a stock I don’t want to hold for the next five years and, ideally, a lot longer than that.
The very last thing I want to do in a crash is sell shares after their value has fallen. Instead, I like to sit back and relax. I want to be comfortable in the knowledge that while the values of my holdings may fall, they probably won’t be wiped out.
I mostly buy solid FTSE 100 blue-chips. They have reliable earnings, loyal customers, steadily rising profits, a strong dividend track record and a defensive ‘moat’ (protection against new market entrants and others who may want to raid its patch).
While that won’t stop a stock from falling with the rest of the market, with luck it means it won’t fall even faster, or worse, go bust.
Step 2: Buy dirt cheap dividend stocks. While I do hold some growth stocks, I feel safer buying dividend shares.
They give me added security during a stock market crash because the income should keep rolling in whatever happens to share prices.
That’s not guaranteed of course, plenty of companies axe the dividend in troubled times, but they typically return, given time.
This could be an opportunity
Since I reinvest all my dividends for growth, falling share prices actually work in my favour. It means my reinvested dividends pick up more stock, at the lower price.
Arguably, this works even better if we get an extended downturn, as I get more dividends and buy more cheap shares.
Step 3: Turn any crash to my advantage. I’m not scared of a stock market crash. In fact, I’d welcome one right now. I’ve learned that a sell-off is a terrific time to go shopping for shares. Even steady, profitable companies are suddenly available at bargain prices.
Also, when share prices are down, yields rise, so I get more income too.
I have my shopping list ready in case the stock market does crash this month. Spirits maker Diageo, Lloyds Banking Group, Legal & General Group, housebuilder Taylor Wimpey and consumer goods giant Unilever are right at the top of it.
They already look cheap. If markets crash they’ll look even cheaper and I’ll dive in.
