The Daily Telegraph - Saturday - Money
Crash prep list: keep your cool and your profit
James Connington lays out a step-by-step guide to help individual investors survive a sustained and panic-driven market crash
Many welcomed the recent global stock market fall as a healthy check to inflated valuations. How can investors prepare for a more sustained crash? February’s sell-off only just entered correction territory, with the S&P 500 falling 10pc before recovering. But there was still a degree of panic, leading share prices to fall across the board. A full-blown market crash typically lasts much longer. During the global financial crisis, the FTSE 100 index fell by around 50pc over two years.
Despite evidence showing that remaining invested when a crash strikes is the best course of action, many individual investors tend to panic and leave the market at the worst possible moment.
Follow this guide to keep your head, and your profit.
Set out a reasonable time horizon
If you start investing with money that you will need back in three years, and there is a stock market crash, you have a problem.
Most experts consider a five-year time horizon to be the minimum required to put money into the stock market, although the longer the better. It took the FTSE 100 seven years to regain its pre-financial crisis high.
Diversify your holdings
Your investment portfolio should already be diversified between assets and markets. That means having exposure to a range of global markets such as the UK, America, Europe, Asia and emerging markets. You should also hold cash and shares in smaller and larger companies in a variety of sectors.
Bonds, gold, infrastructure and property are other assets that can be bought too, typically via funds. The aim is to build a portfolio of investments that do not move in tandem. In an indiscriminate sell-off, all share prices will fall. But some markets will recover faster than others, and assets such as gold and bonds tend to perform well when share prices collapse.
Keep an emergency cash fund
Regardless of what markets are doing, you should have an emergency cash fund to prevent being forced to sell investments at the worst possible time in order to meet day-to-day costs.
Most agree that holding enough to cover three to six months of living expenses is sensible.
Establish a crash buy list
When share prices fall en masse due to panic sellers dumping their stock, businesses with desirable attributes, such as steady earnings growth and a history of reliably growing payouts, tend to be unfairly devalued.
Keep a list of target shares or funds to buy in the event this happens. A suggested list can be found at telegraph.co.uk/go/ buylist.
Have cash ready
In addition to your emergency cash fund, keeping some money to deploy in the event of a crash is sensible. How much you keep on the sidelines depends on the risk you are willing to take, and how concerned you are that a crash is coming.
Holding excess cash in a rising market will be a drag on the overall performance of your portfolio, but better positions you to take advantage of a crash. Holding too little when a crash comes will limit the buying you are able to do.
Stay invested
If you have a reasonable time horizon and a well-diversified portfolio, the last thing you should do when the market crashes is panic sell with the herd. This crystallises losses, and risks selling at the bottom of the market. You will then have to buy back in at a higher price later on.
Ask whether any decision you make fits with your long-term strategy and goals. Remember why you bought a share or fund in the first place. Has that reason fundamentally changed? Has the ability of a company to sell its product or service been damaged? The answer, in most cases, will be no.
Buy
For existing investments, if the investment thesis remains but share or unit prices have fallen, take the opportunity to buy more.
This is also the time to deploy your buy list and to snap up desirable assets at discounted prices.
Just as timing the start of a crash is practically impossible, so too is timing the bottom.
Instead of buying all at once, spread your investments over time to average out the price you pay. Most investment shops offer a regular investment service that does this automatically.