Market crash: How to survive

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has dropped 5.8% so far this year and is set for another large fall today, after the market opened down 2.3%.

Ongoing worries about growth in China, doubts about the US economic recovery and crashing commodities prices, including oil have thrown a cat amongst the pigeons and it seems most investors have become fearful and are selling out of shares.

Active fund managers are seeing billions pulled out of their funds as investors seek the safety of lower-risk assets such as bank accounts and term deposits.

Not helping things are bearish analyst reports, including one from UK bank RBS which suggested investors ‘sell everything’.

Whatever you do, don’t sell out now and hope to get back in when the market starts to recover. That’s trying to time the market – not something that many people are skilled at. By the time you are likely to re-enter the market, most of the recovery has already taken place.

Here’s a few tips on how you can survive the falling market…

  1. Most of the preparation for a market fall should be done before the market falls. That means holding a diversified range of high quality companies, as well as a percentage of your portfolio in cash.
  2. Don’t sell out whether your shares are showing a loss or a gain. If they are high quality companies, (and you shouldn’t really be holding anything else) they will ride out the temporary storm. In fact, in times like this, you should be looking to top up on shares sold off for no other reason than the rest of the market is also falling.
  3. If you own resources or energy shares, it may be too late to get out, and your best chance may lie in hoping for a recovery. If you want some reassurance, you should know that Warren Buffett’s Berkshire Hathaway has reportedly been buying shares in a giant US oil company Phillips 66 (with a market cap of US$41.5 billion) recently.
  4. Make sure you have some spare cash on the side and consider drip feeding it into the market over the next few months. If you are fully invested, your best course of action is to sit tight.
  5. Check that your portfolio is well diversified. If it only consists of shares in the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) and perhaps a few other shares, you might need to sell some bank shares and look elsewhere.
    If you don’t know what diversification is, this article I wrote last year on how to construct a replica balanced portfolio might help.
  6. Setup a watchlist of companies that you’d like to invest in, or buy more shares of if you already hold. I’ve got my eye on a few companies, including REA Group Ltd (ASX: REA), Altium Limited (ASX: ALU), iSentia Limited (ASX: ISD), Technology One Limited (ASX: TNE) and Speedcast International Ltd (ASX: SDA). If their share prices plunge, I’ll be ready and waiting.

Foolish takeaway

The hardest thing about falling markets is mastering your psychology – which screams ‘SELL’, having patience and the confidence that the quality companies in your portfolio will continue to shine. It also pays to remember that market pullbacks and falls are also the best time to buy shares.

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Motley Fool contributor Mike King owns shares of Altium and iSentia. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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