How Can Investors Prepare For a Stock Market Crash?

The first two months of 2016 is likely a period that stock market investors will not forget any time soon: Many stock markets around the world fell hard, including that of Singapore.

Our stock market barometer, the Straits Times Index (SGX: ^STI), closed 2015 at 2,883 points, only to fall by 12% to a low of 2,528 on 3 February 2016. Fortunately, the index has begun retracing some of its losses, ending yesterday’s trading session at 2,809.

Stocks from many sectors were hit hard. Just take oil & gas and banking for instance. In the first two months of 2016, shares of banks such as Oversea-Chinese Banking Corp Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) had fallen by 8% and 13%, respectively. Meanwhile, big oil rig builders such as Sembcorp Marine Ltd (SGX: S51) and Keppel Corporation Limited (SGX: BN4) saw their shares suffer declines of 13% and 20% in that same period.

But, just like the Straits Times Index, there’s been a rebound in those four stocks. From the end of February to yesterday, shares of OCBC, UOB, Sembcorp Marine, and Keppel Corp have gained 8%, 8%, 13%, and 14%, respectively.

This raises a question: “Has the stock market truly bottomed or is this only a brief rally with the worst yet to come?”

Frankly, I don’t have a clue. I personally find it futile to try and predict stock market movements, especially those of the short-term variety. Having said that, while we can’t predict, we can always prepare. And, I believe that preparing for declines and crashes in the market is extremely important. That’s because market crashes happen from time to time – we don’t know when one will happen, but it will someday.

I thought it may be useful to share what I’m personally doing to prepare for a falling stock market:

  1. Reduce my spending

To invest means giving up our present purchasing power to potentially receive higher future purchasing power.

By giving up my current spending on non-essential items – such as frequent overseas holidays, luxury goods, or even regular night outs – I can increase my savings rate by at least 30%-50% each month. For most individual investors including myself, saving more is probably our best way to raise capital.

These savings, if they’re channelled into good companies at the right price, can possibly deliver solid returns for many years into the future.

  1. Research good companies

We need to understand a business before investing in it.

In my opinion, it is best to conduct the required research now so that we can act swiftly in the event that the market starts throwing bargains our way. So, you guessed it right – I am indeed brushing up my research on various companies right now.

  1. Prepare myself emotionally

Many investors tend to overestimate their ability to handle any emotional stresses that can arise during a market downturn. Thus, it is extremely useful to prepare yourself mentally before a market crash takes place so that you can act rationally when stocks fall.

  1. Have a plan

Having an investing plan is an important step to tilt the odds of investing success in our favour. This is best done during times when the market’s climbing or going sideways, since we are likely to be less affected by our emotions. An investing plan need not be anything fancy; it can be as simple as buying S$X worth of shares in Company ABC’s stock at a price below S$Y in Z separate trades.

With the above preparation in place, whenever I hear someone predict a market crash is going to happen soon, I smile and whisper “bring it on!”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.