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Many investors are bracing themselves for a stock market crash this week. I really do, after US president Donald Trump’s threats over the weekend in Greenland. So far the damage is minimal.
That could change at any time. Share prices can drop without warning, often when we least expect it. Short-term volatility is the price investors pay for the higher long-term returns that dividends tend to deliver over time. So how should we react to a short-term stock price crash?
Fortunately, there is an easy way to survive market volatility. Invest for the long term, buy only stocks with a five-year horizon, and for a long time. No one wants to be a forced trader during a dip, or worse, a panic trader. 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.
The FTSE 100 held firm
This is not just survival. It’s about taking advantage of a dip, correction or complete crash to find high-quality stocks at temporarily reduced prices, then you sit and wait and wait to be discovered. With a little muscle, investors can turn a stock market crash to their advantage. It’s not easy though. It’s looking for a strategy. Here is mine.
First, investors must accept their limitations. No one can predict a stock market crash with any consistency. The lucky ones rarely repeat this trick. Too many variables.
Anyone who refuses to invest because they believe a crash is an imminent risk of missing out on years of profits and growth while waiting. That’s the mistake I’m trying to avoid.
That said, it helps to keep some cash on hand, just in case. When bargains come up, I want money to feed.
It helps to know what to buy before panic sets in. The aim is to identify companies with stable income, strong management, a line of defense against competitors and clear internal advantages, whose shares have fallen because the broader market is selling off.
British American cigars are worth considering
Tobacco maker British American cigars (LSE: BATS) is a good example. A crash can provide a rare opportunity 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 profits every year for the millennium.
Investors also experienced growth. Shares are up 43% over the past year and 85% over the past two. That pace won’t last forever. Shares don’t look overpriced today, with a price-to-earnings ratio of about 11.7. But the market sell-off will reduce that, while its trailing yield of 5.7% will rise as the share price falls.
There are risks. Smoking rates are falling, regulations may be stricter, and areas of growth such as vaping may be scrutinized. Investors must weigh those carefully. But if stocks go down as part of a broader dip, they will have an even greater margin of safety. It’s worth considering, even if the markets don’t hit.
If the markets fall, I don’t expect to put down directly. That is almost impossible. Instead, I will buy slowly during the panic, and wait for recovery. I don’t know when the next stock market crash will come but when it does, I’m ready.
