How to prepare for a market crash

The stock market has been going up for quite some time now, and every now and then we can read about some market analysts predicting the next crash or crisis. The common consensus is that it’s not whether a market crash will happen, but only when it will happen. And I fully agree. It would be foolish to think that markets can only go up. Someday, something will happen that will send share prices to rock bottom.

How investors can prepare for a market crash

And yet, every long-term investor out there will tell you the same thing: Staying in the market is the only right choice. Peter Lynch comes to mind with his fairly accurate quote that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Yet this doesn’t mean that there is nothing that could or should be done. And in my case, I follow the strategy of long-term focused investors. I invest in dividend-paying companies. Especially in those which have a track record of paying out dividends even when a recession hits their profits.

The rationale behind it is two-fold.

For one, I want to make sure to have a steady cash-flow coming in, no matter what happens around the world. Those companies that not only survived the financial crisis back in 2007 and 2008 but also managed to keep or even to increase their dividends are great picks in my view.

In my personal portfolio, this would be companies like AT&T (T), Royal Dutch Shell (RDSB), AbbVie (ABBV), or GlaxoSmithKline (GSK). Other reliable candidates are the likes of Starbucks (SBUX), Apple (AAPL), Imperial Brands (IMBBF), Vodafone (VOD), E.On (EONGY).

Communications, Utilities, Medical, and Consumer stocks have proven reliable partners over the years to keep generating cash-flows no matter what. This kind of companies are called SWANs, because they let investors Sleep Well At Night.

Secondly, having a steady and continuous cash-flow allows an investor to take advantage of market corrections. While others might sweat and crumble watching their portfolio value crashing down, investors with large passive income from dividends get into the unique position of having the opportunity to buy company shares at rock-bottom prices. Following Warren Buffetts mantra of “being greedy when others are fearful”, this strategy has proven to provide outstanding results in the long-run.

Not giving into emotions

All this is easier said than done. And yes, I have been there. On a few occasions, I have watched some of my shares dropping as much as 70% or even 80%. When the value of your portfolio drops down from 50.000 Euros to be only 10.000 Euros – it really does hurt.

You can’t sleep. You get nervous, you get easy to panic and it seems that you get constantly into a bad mood.

This has completely changed since I started to focus on dividend-paying stocks. While I still have some shares that are rather speculative and pay none or very tiny dividends, the majority of my investments are in those stable and long-term focused business models.

Stable investments help us to keep our emotions in check and thus to make smarter decisions. And in the long-run, there is no smarter financial decision than to be invested.

Disclosure: I own shares of all the companies mentioned in this article.

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