Here’s how I’m getting ready for a stock market crash

Looking at the recent performance of the FTSE 100 it may seem that the stock market is in rude health. Just last week, the index of leading British blue-chip shares hit a new all-time high.

Still, stepping back and considering the wider global economic and geopolitical environment, there may seem to be less cause for celebration.

Nobody knows for sure when the stock market will next crash. It could be today or it could be decades from now. But we do know from history that sooner or later, it will happen.

Rather than trying to time a crash, I am instead using my effort to prepare for one, whenever it comes.

Reviewing current holdings

Typically a stock market crash does not happen in isolation. Usually it is part of a wider economic downturn, although in some cases the crash may happen before that downturn is fully evident.

Such a downturn could mean lower profits for many companies, leading to a lower share price.

As a long-term investor, I tend not to react to the everyday shifts and turns of the stock market. But sometimes, the potential of an economic slowdown could hurt the investment case for certain shares.

So, from time to time I review the shares I already own and consider whether any of them look vulnerable to a shift in the economic currents.

As an investor, it can be easy to focus on the potential return from owning a particular company – but assessing risks is a very important part of successful long-term investing.

Making a wishlist well in advance

But while a sudden stock market downturn can mean shares falling a lot in a short time, that can present a buying opportunity.

Warren Buffett talks about investing in great businesses at attractive prices. Usually there are a bunch of great businesses I would be happy to invest in – if only I could do so at an attractive price.

A crash can throw up such prices – but sometimes only fleetingly. So I am getting ready now by updating my wishlist of shares I would like to own, if I could buy them at the right price.

This share is on my wishlist!

For example, one share I would happily buy at the right price is chipmaker Nvidia (NASDAQ: NVDA).

The company has seen both revenues and profits soar in recent years thanks to booming demand for specialised chips as companies build their AI capabilities.

But even before that, Nvidia was well established. It has a large installed customer base, world-leading design and manufacturing skills, and lots of proprietary intellectual property.

So, if I like the business so much, why have I not yet invested?

In short, valuation.

The current price-to-earnings (P/E) ratio of 37 does not offer me sufficient margin of safety, I feel. After all, Nvidia faces risks ranging from uncertain medium-term demand for AI chips to the costs of heightening trade disputes.

However, the share price has been falling and while that P/E ratio is still too high for my tastes, it is getting closer to what I would see as an attractive valuation.

Nvidia is one of the names on my wishlist of shares I would consider buying if stock market turbulence drives their price far enough down.

The post Here’s how I’m getting ready for a stock market crash appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.