Will the 2020 stock market crash be followed by another? Many pundits are predicting it will. This should be unsurprising to a serious investor as a large market sell-off is always a possibility.
In 1929, the market crashed due to over-valued shares, low wages, and high debt, resulting in the Great Depression. 2008 was a similar story with loose credit, high debt, and reckless speculation leading to the market righting itself. A global economic shutdown is the reason behind the recent 2020 market crash.
However, whatever the cause, the point is that market crashes happen relatively frequently. So a plan to deal with them is a key part of a successful investment strategy. Accepting volatility is a necessity if you want to benefit from the potential returns a market crash can offer. It’s worth your while to prepare in advance if you want to make money and following these three investing principles could help.
1. Be ready to buy
Ideally, every investor buys shares low and sells high. However, realistically, you can’t tell in advance on which days you should buy cheaply or sell on a peak. Even top equity analysts can’t predict the future, no matter what the hype says.
Consequently, keeping some money to one side for the inevitable market crash, or single share sale, could be a wise move. You may not buy at the bottom of a trough or at the top of a peak, but you can look to purchase a good company at a great price that will help to optimise your future returns.
It’s said that the really big money is made from concentrating your stock-picking efforts into a single industry or company. Think Bill Gates of Microsoft or Sir James Dyson of Dyson.
However, you only need to look at the movements on the Sunday Times Rich List to conclude that this doesn’t always work. People change places all the time! If you keep all your investments in one place, you may gain initially, but it won’t protect you from the creative destruction that can happen across the stock market. As one industry gains momentum, another may flounder.
It’s wise to diversify your portfolio across industries. That way, the shareholder returns of one investment may offset the loss on another. And as investor Seth Klarman says: “The avoidance of loss is the surest way to ensure a profitable outcome.” This is because the effects of compounding even moderate returns over the long term are substantial.
3. A ‘foreign policy’ to avoid a market crash
Investing in foreign stocks is certainly not mandatory for a well-diversified portfolio. However, I would say it’s advisable.
If you’re living and working in the UK, and you’re paid in sterling, you’re effectively betting on the UK economy. But it’s not always wise to keep all your money at home. Nobody knows what the future holds anywhere in the world. Putting some money into foreign stocks, such as into the US stock market, may help to insure you against the risk of putting all your money into one single economy.
Stock market crashes and share price volatility are par for the course when investing. To make money as a successful investor, you manage the risk by buying good companies at great prices within a diversified portfolio.
The post Stock market crash: I’d follow these three investing principles to make money appeared first on The Motley Fool UK.
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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020