Could you survive a stock market crash?

A lot of investors are becoming increasingly wary of a bubble in AI shares that could cause a stock market crash. Could your portfolio survive if it comes?

One of the things that makes preparing for a big downturn in share prices challenging is the fact that nobody knows when it’s coming. There are, however, a few things you can do to be ready.

Sell… or don’t

Over the long term, shares – especially ones in growing businesses – tend to be better investments than cash or bonds. That means it’s generally better to own stocks than not. 

As a result, my strategy for surviving a stock market crash is hold and wait for as long as it takes for prices to come back. But this isn’t an option for everyone. 

Investors sometimes want or need to sell shares for one reason or another. But for someone that’s going to do this, it’s better to do it when prices are high than when they’re low. 

Selling during a downturn is one of the most effective ways to turn a good investment in a bad one. So if you’re likely to be in this position, I think you should consider selling now.

Valuation

One of the things that makes it easier to avoid selling in a downturn is focusing on valuation. Knowing that a stock is worth more than the price it’s trading at is helpful.

After a bubble bursts, there’s no reason to think the bubble shares should get back to their previous levels. A good example is Zoom Communications, which had a share price of $559 five years ago.

That implies a market value of $187bn, but it’s difficult to make sense of why anyone might think the company is worth that much when its operating income is less than $1bn.

Given this, it’s hard to see why Zoom stock should ever get back to its October 2020 level. In contrast, shares that are undervalued ought to trade for what they’re worth sooner or later.

A stock to consider 

Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) can be like watching paint dry. But for anyone wanting to stay invested in a stock market crash, I think it’s well worth a look.

The worst thing that could happen to the firm is probably a massive insurance liability coming from some sort of natural (or man-made) disaster. That could cost a lot.

Buffett’s company, however, has huge cash reserves to deal with this kind of situation. Especially in terms of reinsurance, it’s more conservatively financed than its rivals.

That could also be a huge advantage in a stock market crash. If prices suddenly get cheap, Berkshire’s balance sheet should enable it to do deals on unusually attractive terms.

Surviving and thriving

Stock market crashes have a way of catching people off guard even though everyone’s looking for them. So the best thing to do is to try and be ready at all times.

I think the best approach to surviving a downturn in share prices is to wait it out. But to do this, investors need to make sure they have enough cash savings to deal with emergencies.

With shares that trade at attractive valuations, there’s also a clear reason for thinking they should bounce back sooner or later. That’s my plan for surviving a stock market crash.

The post Could you survive a stock market crash? appeared first on The Motley Fool UK.

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Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has recommended Zoom Communications. 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.

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