Volatility has increased on the FTSE 100 over the past couple of weeks. Concern is resurfacing about the strength of the UK economy. This ranges from the wobbly property market to the prospect of interest rates increasing further. If these factors triggered a stock market crash, here are the actions that I’d take from a reactionary point of view.
Pick the areas of focus
Different sectors will react differently depending on the root cause of the problem. My aim would be to look at the hardest hit areas and make a judgement call on if it has been oversold in the short term. Often during a crash, fear means many share prices fall below the long-term fair value. This can represent a good opportunity for me to buy.
Yet I can only make this call as the crash is unfolding. If there’s reason to believe that companies in the sector could genuinely go bust, it’s not worth the risk.
Load up on dividend stocks
With the whole market falling, it can act to push up the dividend yield on different stocks. The yield is calculated from using the dividend per share and the share price. So a lower share price and the same dividend per share will increase the yield.
On this basis, I’ll look for shares that have been able to pay out sustainable dividends over past periods of stress. This includes periods like the financial crisis in 2008/09 and the Covid-19 pandemic in 2020/21. This gives me confidence that whatever the cause of the crash, income could likely still get paid.
Average-down on existing holdings
The probability is high that whatever stocks I’m already holding at the time of a crash will be worth less during the turmoil. In order for my future self to thank me, I’d consider investing more in my existing stocks to average down my buying price.
For example, I might have bought a stock at 100p that falls down to 80p. If I add the same amount of funds again, my average price gets reduced from 100p to 90p.
Still maintain some dry powder
Despite wanting to pick up some stocks on the cheap, I’ll always keep some money left in the bank. I’m not talking about essential money needed for bills. But with my spare cash, I always want to leave some on hand.
This is because no one knows exactly how low the market could fall. If I invest all in one go, I’m very exposed to the market falling another X% after I’ve bought. Therefore, keeping some cash to one side can help me to buy in chunks over a period of time and be more disciplined with my purchases.
Don’t panic Captain Mainwaring!
My final action doesn’t specifically relate to a particular stock. Rather, it’s to do with my mindset. If the market does take a sharp nose dive, I need to stay calm. If I let emotions get the better of me, I’ll end up making some dumb choices.
The post 5 actions I’d take with a stock market crash appeared first on The Motley Fool UK.
However, don’t buy any shares just yet
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Secure your FREE copy
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#ffffff”, ‘color’, ‘#FFFFFF’);
})()
More reading
- Here are 2 dividend stocks yielding more than the inflation rate!
- Are Glencore shares a no-brainer buy to turbo-charge passive income?
- 9 shares that Fools have been buying!
- How to turn a £20k ISA into a £17,423 yearly second income
- With a spare £1,000, I’d boost my passive income with these FTSE 250 dividend stocks
Jon Smith 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.
