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Yes, another stock market crash is coming. How to get ready

Harvey Jones
Graph of price moves, possibly in FTSE 100

Share prices have rallied strongly after the stock market crash in March, but the recovery looks to be over for now. The FTSE 100 is slipping back towards 6,000, as investors get nervous. They have good reason to be, as the UK suffers the largest GDP drop in history.

The economy fell an incredible 20.4% in April as we were all locked in our homes. Yet at the same time, share prices flew. Despite all the stimulus hitting stock markets, that was not sustainable.

The stock market could crash again over the weeks ahead. Another coronavirus flare-up in Beijing, China, has spooked markets. Investors will react badly to any signs of a second wave of Covid-19.

The FTSE 100 could fall again

Even if we scrape through the summer, autumn could be rough when government-funded furlough schemes end and unemployment surges. As we have seen, the pandemic has also frayed political tempers, and who knows where that will lead us.

I do not know exactly when the next stock market crash is coming, nobody does. That doesn’t mean you shouldn’t prepare for it though. 

First, take a look at your investment portfolio, and make sure you have the right balance of shares, bonds, gold and cash to match your attitude to risk. You should aim to hold shares for a minimum period of five years, and ideally much longer. If you can do that, you have no need to worry about the next stock market crash. Simply hold on and wait for it to blow over. Crashes always do, given time.

As we saw in April and May, shares can recover almost as quickly as they crash. If you are out of the market, you are very likely to miss it. That is why we urge readers never to sell during a crash, but to buy shares instead when prices are down.

If you think the stock market could crash again, start building up a pot of money so you can take go bargain hunting when it does. Do some research on the FTSE 100, and start working out which stocks you will buy when share prices do crash.

Buy shares in the stock market crash

Look for companies with strong balance sheets, healthy cash flows, minimal debt, loyal customers and a healthy moat against competitors. Then when the stock market crash comes, work out which companies on your watchlist look like the best stocks to buy.

The beauty of a crash is that when markets fall, top stocks are typically sold off along with the bad ones. This gives you a great chance to go hunting for bargains, with the aim of holding them for the long term.

Next time the stock market crashes, grab the chance to buy shares.

The post Yes, another stock market crash is coming. How to get ready appeared first on The Motley Fool UK.

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Harvey Jones 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