The uncertain economic outlook means that a second stock market crash in 2020 is a very real threat facing investors. As such, starting to prepare for it now could be a sound move.
Through analysing your existing holdings, identifying potential buying opportunities and holding some cash in your portfolio, you may be able to use a stock market decline to your advantage.
Identifying buying opportunities ahead of a market crash
As the recent market crash showed, sharp declines in stock prices can be extremely swift and without any prior warning. The stock market declined at an exceptionally fast pace earlier this year, and then went on to rebound at a relatively brisk pace.
As such, many investors did not have sufficient time to identify attractive stocks before they had rebounded to higher price levels. This means that they may have missed out on good value opportunities that were only available for a very limited time.
Ahead of a potential second market crash, it may be a good idea to make a list of companies that you feel offer long-term investment appeal. For example, they may be dominant players in their industry, and have solid financial positions that will allow them to survive a tough period for the economy. Through knowing which companies you are positive about prior to a stock market decline, you can be in a strong position to act upon lower prices that may only be available temporarily.
Assessing your current holdings
As well as searching for potential stocks to purchase ahead of a market crash, it may be worth reassessing your existing holdings. The economic landscape has changed dramatically over the past few months, and the operating environments for many businesses may be very different than when you purchased them. They may need to adapt their business models, and could be unable to do so.
Through identifying which stocks in your portfolio are worth holding for the long run, you may be able to reduce your number of holdings now ahead of a market decline. This may increase your cash balance so that you have greater liquidity in a bear market that provides you with greater scope to act upon low valuations.
Holding cash
Clearly, holding cash for the long term is likely to lead to disappointing returns relative to stocks. However, with the potential for a second stock market crash, having some cash in your portfolio could be a sound move. It may enable you to take advantage of lower stock prices to a far greater degree than otherwise would be the case.
It may also provide peace of mind so that you view a stock market fall as an opportunity to invest, rather than a reason to be fearful. This attitude can help you to capitalise on a temporary decline in stock prices ahead of a likely recovery.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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