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How to prepare for the next big market crash

September 28, 2020

Kristen Lunman

Written by Kristen Lunman

Kristen is General Manager of Hatch - a digital investment platform that gives New Zealanders access to the US share markets. Powered by Kiwi Wealth, Hatch provides easy, affordable, and reliable access into the largest, most liquid share markets in the world.

How would you feel about losing a chunk of money in a matter of minutes? We can’t predict the future, especially when it comes to turbulent markets, but we can be prepared. Here’s how.

shocked woman looking at newspaper

2020 hasn’t been the best of years thanks to the global Covid-19 pandemic, but surprisingly it HAS been a great year for investors. In the past 12 months to 31 August, the S&P 500 index gained a remarkable 19.6%, outpacing its average 12.4% return over the last five years.

Despite this positive data, in the last month, Mr. Market got the jitters anyway. Maybe it was the change in seasons, perhaps too many sleepless nights and caffeine – who knows! Whatever it was, the S&P 500 index dropped more than 9% from its closing high on 2 September to a low on 23 September, and even the tech-focused NASDAQ index, which includes hot companies like Tesla (TSLA) and Amazon (AMZN), dropped almost 12% in the same period.

If you have your own share portfolio, whatever you do, don’t panic. Easier said than done, but even experienced investors can find these market drops unnerving. If this is your first taste of a market drop, you need to know that it won’t be your last. The main thing is - don’t panic. We can’t predict what the future will bring, especially when it comes to turbulent markets, but we can be prepared. Here’s some simple steps you can take today to prepare for the ups and downs that come with investing in the share markets.

Don't be complacent with your investing

It's easy to sit back and let Mr. Market work his magic when your investments are going up day after day. If it ain’t broke, don’t fix it – and if you’re growing your wealth, you must be doing something right, right?

However, over time risk can creep into your investments. This bull market has had an incredible run despite the world’s problems, but that doesn’t mean there aren’t risks to consider. Complacency might be your biggest risk.

So, how do you combat complacency? Start with a big slice of Humble Pie. You might be killing it on the markets, but don’t start comparing yourself to experts like the Oracle of Omaha, Warren Buffett. If you get too confident, you might take on too much risk.

Maybe your early investment in Tesla (TSLA) has grown into a significant part of your portfolio. It might be time to diversify to spread out that risk. Or, maybe you've taken a chance on a speculative company that you don’t know very well. Always do the research first, even if you’ve struck gold before. Remember, what goes up generally must come down sooner or later, and that includes the markets.

Take stock of your investments regularly

Even if the markets do go down, if you’re vigilant, it shouldn’t be too much of a blow. Vigilance is complacency’s number one enemy, and it’s relatively easy to do. It doesn’t mean logging into your Hatch account every 20 minutes. It means revisiting your financial plan or creating one if you haven’t already.

How about that rainy day fund? Is it tracking along nicely, or is it time to top it up? And don’t even get us started on paying down your credit card debt. Nothing will expose the dangers of carrying too much debt like a market crash.

Once you’ve sorted out your savings, it’s time to ensure you have different types of investments in your broader portfolio (e.g. property, shares, cash) to reduce the risk of having all your eggs in one basket.

And don’t forget to check that your investments still align with your personal goals. Consider the risk of a market crash and how it would or could affect your dreams of retiring overseas or setting up your kids with a home deposit. If it’s not looking good, a quick rebalance or complete makeover of your investment plan could set you right and put you back on track with your life goals. Write your plan down so you can refer to it and remember what you're working towards.

Remember why you invested in companies in the first place

Good companies, bad companies and, yes, even electric car companies can all sink a little when volatility strikes. You might get tempted to sell everything and head for your bunker in Martinborough or Waiheke. Instead, stop, breathe and reflect. Remind yourself why you chose the companies you own in the first place. You had good reasons! Maybe you were drawn to the Disney (DIS) brand because you grew up on Star Wars. Maybe your love for Lululemon (LULU) tights pushed you to invest. Look at what’s in your portfolio and check to see if the long-term prospects of the companies have fundamentally changed. They probably haven’t. After all, the value of a company is determined by its future earnings, not by what’s happening right now or even over the next 6 months.

It’s easy to run away with your emotions, particularly when the market drops. You might have the urge to sell up, but you can fight it. From childhood, we’re trained to associate red with danger. So, when you open your Hatch app and see red, well, your animal instinct brain reacts. But you’re smarter than that. Keep your head, close the app, and back your research.

How Hatch investors are preparing for a market fall

Some investors simply can’t stomach watching their investment portfolios dive by 25%. If this sounds like you, you might be surprised that some industries perform quite well during recessions. As we enter an economic slowdown, think about what things you’re buying now. There’s still an ongoing demand for certain household items like toothpaste, soap, shampoo, laundry detergent, dish soap, toilet paper (if you can find it). So, toiletries and consumer staples are doing well. Likely, you are still buying alcohol and of course, food, but when it comes to clothes, you might consider shopping at low-price chains over your favourite boutique shops. All the industries just mentioned typically perform well regardless of what's happening with the economy.

We asked our insightful Hatch investment community for their top tips on preparing for the next market drop:

  • Keep a cash buffer

    Having some cash on hand will mean you're not caught short financially and forced to sell your shares at exactly the wrong time. It’s also a great way to take advantage of any bargains that come your way in a sell-off.
  • Take advantage of ETFs to diversify your investments

    Exchange-traded funds, or ETFs, are an excellent way to get exposure to a whole range of companies in one handy investment. Just look at The Russell 3000 Index iShares (IWV). It has 3000 different companies! Try to find ETFs that own companies across a range of industries. Industry-specific ETFs won't provide as much diversification as a fund that holds a range of unrelated industries.
  • Buy shares with a “margin of safety”

    Because the future is unpredictable, a “margin of safety” can add a layer of protection. Investment legend Seth Klarman popularised the idea in his book 'Margin of Safety'. This is all about hunting for companies where the share price trades for well below the intrinsic value. Well worth the hunt.
  • Switch off and go surfing

    Sometimes the best approach is just to switch off and go surfing. You're investing for the future; this is a long game. Don’t pile on the extra stress by checking your portfolio every day, even when it’s super tempting. Switch off and walk away. Walk the dog. Catch up with friends. Do any activity that gets those endorphins humming. A good life isn’t about how much money you have in your portfolio or the bank; it’s about living a balanced life.

If you're interested in recently listed US IPOs, or accessing over 3000 other US-list shares easily and affordably, take a look at Hatch.

This blog is of a general nature and is not personalised financial advice. This blog is not a recommendation to invest in any of the companies or funds listed in it.

Tags: Investing, Hatch

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