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Many investors braced themselves for a stock market crash this week. I certainly did, after US president Donald Trump’s weekend threats over Greenland. So far the damage has been slight.
That could change at any moment. Share prices can plunge without warning, often when we least expect it. Short-term ups and downs are the price investors pay for the superior long-term returns that equities tend to deliver over time. So how should we respond to short-term share price mayhem?
Happily, there’s a simple way to survive market volatility. Invest for the long term, only buying shares with a minimum five-year view, and ideally longer. Nobody wants to be a forced seller during a dip, or worse, a panic seller. Long-term investors can sit tight and wait for markets to recover, which history shows they always do eventually. That brings me to the second part of my strategy.
FTSE 100 holds firm
This isn’t just about survival. It’s about using a dip, correction or full-blown crash to snap up high-quality shares at temporarily reduced prices, then sitting back and waiting for the recovery. With a little nerve, investors can turn a stock market crash to their advantage. It isn’t easy though. It demands a plan. Here’s mine.
First, investors must accept their limitations. Nobody can predict a stock market crash with any consistency. Those who got lucky once rarely repeat the trick. Too many variables.
Anyone who refuses to invest because they’re convinced a crash is imminent risks missing out on years of dividends and growth while they wait. That’s a mistake I try to avoid.
That said, it helps to keep some cash available, just in case. When bargains appear, I want money to deploy.
It helps to know what to buy before panic sets in. The aim is to identify companies with steady revenues, strong management, a defensive moat against competitors and clear in-built advantages, whose shares fall simply because the wider market is selling off.
British American Tobacco is worth considering
Cigarette maker British American Tobacco (LSE: BATS) is a good example. A crash could offer a rare chance to consider this FTSE 100 stalwart at a knockdown price. Big Tobacco isn’t everyone’s cup of tea, but British American Tobacco has an exceptional record of shareholder returns, increasing its dividend every year this millennium.
Investors have got growth too. The shares are up 43% over the last year and 85% over two. That pace won’t last forever. The shares don’t look expensive today, with a price-to-earnings ratio of around 11.7. But a market sell-off would push that lower, while its 5.7% trailing dividend yield would rise as the share price fell.
There are risks. Smoking rates are falling, regulation could tighten further, and growth areas such as vaping may come under scrutiny. Investors must weigh those carefully. But if the shares dropped as part of a wider dip, they’d have an even bigger margin of safety. It’s worth considering, even if markets don’t crash.
If markets do tumble, I don’t expect to time the exact bottom. That’s almost impossible. Instead, I’ll buy gradually during bouts of fear, then wait for the recovery. I don’t know when the next stock market crash will come but when it does, I’m battle ready.
