5 ways to prepare for a hypothetical stock-market crash

This article wasn’t written based on a prediction of a stock market crash in 2024. “Personally, I’m not into forecasting and have no knowledge as to when or how, or the size of the next market crash,” the writer asserts.

Nevertheless, it is only prudent to know that markets work in cycles of booms and busts. In boom times, the outlook is optimistic. In busts, not so much.

If you’re an investor who’s in it for the long term, it’s wise to prepare for either situation. But given that a crash is of greater concern for most people, here’s a list of ways you can start preparing for this unwanted scenario, to help you “fast track” your way towards better returns in the future.

1. Keep emotions in check

Many people tend to make investment decisions based on emotions. During booms, they might become overly confident, optimistic and careless; during busts, they become negative, overly wary, and risk-averse.

When people think they can make easy money from the stock market, as they would during a boom, they tend to invest without building reserves. This causes them to fall far and hard during a crash.

Conversely, during a downturn, many tend to lose confidence in the stock market and hoard cash, which causes them to miss opportunities to build wealth for the long term.

As investors, we need to learn how to do the opposite. During booms, take it slow and not invest. During busts, invest more. It may sound counterintuitive, but this is actually practical as it would allow you to spot undervalued stocks that are brimming with potential for future wealth building.

2. Think long-term

The following refers to fundamentally solid stocks, which deliver consistent profits and operating cash flows while maintaining strong, robust balance sheets.

The objective of investing is not generating quick returns; rather, it should be about the number of shares of a solid company one might amass over a period of, say, 10 years. It’s about the quantum.

So, a theoretical “30% price dip” on a stock that is fundamentally solid can be a blessing for a long-term investor whose objective is to accumulate, not trade.

If you have a trading mindset, it would be hard to manage a big portfolio of, for instance, RM1 million. Given that you cannot foresee when a crash will happen, what would you do if your portfolio fell to RM700,000 within a short span of time? A person with a trading mindset would panic and cut their losses.

But if your big portfolio consists of dependable stocks, you would know that these companies have a solid track record when it comes to profits, cash flow and dividends in the long-term. These firms can withstand crises – so why panic sell?

In the end, smart investors will have more shares, earnings and growth regardless of market conditions, which is how they build bigger portfolios and become wealthier.

3. Have cash reserves

Hey, if Warren Buffett could keep billions in cash despite his successes, why not everyone else? Some might say “cash is trash; only investment builds wealth”. In actuality, cash is about liquidity, while stocks are about growth and wealth building.

As investors, it’s important to build cash reserves. Having dollars or ringgit in the bank might not yield much, but cash will come in handy during emergencies – thereby allowing you to keep your investments – and during crashes, allowing you to grab more shares at lower prices.

4. Use valuation

When stocks rise, people tend to rush to buy. But savvy investors will turn to stock valuation.

More often than not, they will find it tricky to identify good deals because stocks, even fundamentally good ones, tend to be overvalued during a boom and don’t yield much in the way of dividends.

So, going back to the previous point about cash reserves, if there are no stocks to invest in, it’s recommended you keep your money in fixed deposits, or in platforms such as KDI Save or flexi-loan accounts.

5. Have a watchlist

What makes investors confident during market crashes? The answer would be watching stocks for years in advance, and building knowledge on the business models and finances of companies before any crash.

In short, it’s essential to do due diligence, which is a long game that requires much forward planning. By doing your homework well in advance, you equip yourself to be able to cope during the next major global downturn.

So start putting in the work today, because by the time the next crash happens, it would already be too late.

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