Image source: Getty Images
The possibility of a stock market crash is back in the headlines.
Fears of a US recession have hit the Nasdaq The index is down 13% from its 52-week high as I write this on August 6. That's technically a correction (which is at least a 10% drop), if not a crash, which requires a 20% drop.
In Japan, the Nikkei 225 On August 5th it fell by 12%, which is a one-day correction. However, as I write this the next day, it is back up by 10%. But it is still 18% below its July high, so we are on the verge of collapse.
Meanwhile, ours FTSE 100 Index It briefly fell below 8,000 points, although it is just above that level as I write this.
It's been a traumatic week and it's only Tuesday.
Build some protective barriers
How can we protect our investments against a stock market crash? One may or may not be in store for us now. I doubt it very much myself, now that the cautious Bank of England has been persuaded to make its first interest rate cut.
But one day there will be another crash, that's as certain as anything else in the stock market.
And that knowledge alone is enough to tell me one thing: I need to hold some defensive stocks. Unilever (LSE:ULVR), for example.
Look at the long term
The FTSE 100 has fallen, yes, but that only means that so far in 2024 it is up only 3.3%, when a week ago it was up 8%. So, in reality, it has not suffered any losses.
Unilever is, however, up 25% so far this year, even after a further modest fall. The share price is only back to where it was a week ago. The Footsie, meanwhile, has fallen to April levels. Still, it's not a disaster.
It's true that Unilever has been through a rough patch, down 3% over the past five years, and I see more uncertainty as the company works to refocus on key brands.
But looking at the long term, share prices have more than quadrupled since the beginning of 2000. The FTSE 100 is up just 15% (but it started the century with the dotcom bubble burst).
Keep three things in mind
So how should we prepare for the next stock market crash, whether this week, next year or a decade from now?
I have three key steps. First, keep my stock market investments diversified. That should ease the pain of a single-sector downturn.
Then, buy to hold your investments for at least a decade. It's only been a few years since the 2020 crash that caused so much panic. Yet the UK stock market is already miles ahead of where it was before Covid.
If we don't plan to sell our stocks next week, why would it matter if prices fall this week?
Let's all be like the little Buffetts
Who did better in 2020? That's right, investors who bought when prices plummeted, not those who sold and suffered big losses.
Speaking of market crashes, Berkshire Hathaway Investment guru Warren Buffett famously said:
Every decade or so, dark clouds fill the economic skies and, for a brief period, they will rain gold. When torrential downpours of that kind occur, it is imperative that we rush out into the street with buckets of washing, not spoons.
Letter to shareholders, 2016
When stock markets fall, it rains gold.
