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Talk of a stock market crash is in the news again.
Fears of a US recession have distracted them Nasdaq is down 13% from its 52-week high, as I write on August 6. That's technically a fix (at least a 10% drop), if not a crash, which requires a 20% drop.
In Japan, the Nikkei 225 down 12% on August 5, for a one-day correction. Anyway, as I write the next day, the backup is 10%. But it's still down 18% from its peak in July, so we're on the verge of a crash there.
For now, ours FTSE 100 I briefly dipped below 8,000 points, although it is above that level as I write this.
It's been a sad week. And it's only Tuesday.
Build some crash barriers
How can we hedge our investments against a stock market crash? We may or may not be in now. I highly doubt it either, as the cautious Bank of England has been convinced to cut its first interest rate.
But there will be another drop one day, as close as anything in the stock market.
And that information alone is enough to tell me one thing. I need to hold some stocks for protection. Look Unilever (LSE: ULVR), for example.
Take a long look
The FTSE 100 has fallen, yes. But all that means it's only up 3.3% so far in 2024, when last week it was up 8%. So it's actually not a loss at all.
Unilever, however, is up 25% year-to-date, even after a small fresh dip. The share price is only back where it was last week. Footsie is down to April. However, it is not a disaster.
Admittedly, Unilever has had its fair share of struggles, down 3% over the past five years. And I see more uncertainty as the company works to refocus on core businesses.
But look back over the longer term, and the stock price has more than quadrupled since the early 2000s. The FTSE 100 is only up 15% (but it started the century with the bursting of the dotcom bubble).
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 main steps. First, keep my stock market investments diversified. That should ease the pain of a single-sector collapse.
Then, buy to hold for at least ten years. It's been a few years since the 2020 crash that caused so much panic. However the UK stock market is already well ahead of where it was before Covid.
If we don't plan to sell our stocks next week, why doesn't it matter if prices go down this week?
Let's all be like little Buffetts
Who is doing best in 2020? Of course, investors buy when prices drop. Not those who sold and suffered huge losses.
Speaking of market downturns, Berkshire Hathaway Investment magnate Warren Buffett said:
Every decade or so, dark clouds will fill the economic sky, and they will rain on gold for a while. When it rains like this, it is important that we rush outside with bathtubs, not teaspoons.
Letter to shareholders, 2016
When stock markets crash, it rains gold.
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