The ‘no-brainer’ way to play the coming stock market crash

As a reminder, it was just two weeks ago when Warren Buffett said on CNBC

“… we are not in bubble territory or anything of the sort.”

Let me guess…

Right now, you’re nervous about the stock market.

Hardly a day seems to go by without some so-called “expert” predicting a market crash is just around the corner.

Yesterday’s headline at the AFR screamed…

Are we edging closer to a ‘sell everything’ market?

Today’s headline at Marketwatch says…

Crash guru warns the Dow could plunge to 14,800.

The Dow hasn’t produced a decline of at least 1% for 104 trading days.

Not even Trump’s election victory could derail this market. Nor missile firings from North Korea, or a tumbling oil price.

This week the US Federal Reserve is all but certain to raise interest rates. We’ll know early Thursday morning.

Once upon a time, not too long ago, the market would throw the mother of all tantrums at the mere prospect of US interest rates rising.

Not now.

It’s on cruise control, dancing to the tune of an improving US economy, with more juice to come courtesy of Trump’s promised great big tax cuts and phenomenal infrastructure spend.

What could derail these markets?

There’s always someone with a theory.

One is that higher interest rates will smash the bond market which in turn will have knock-on effects to equity markets. And higher US interest rates are coming this week.

Here in Australia, a plunging iron ore price could put the skids on our market. Just last week Capital Economics predicted the iron ore price could halve by the end of this year as increasing supply collides with slowing Chinese demand.

Up until today, in the last 5 days the BHP Billiton Limited (ASX: BHP) share price had fallen 8.2% to $23.65, almost putting it into correction territory.

All those hard-fought gains gone in the twinkling of an eye.

Suddenly, I look stupid and greedy for not selling my BHP shares at my previously publicly stated target price of $25.

Or maybe not…

Overnight Goldman Sachs came out and said concerns about slower demand from China was “misplaced.”

Coupled with a rising iron ore price, in morning trade on the ASX, the BHP share price is now trading back above $24.

It’s enough to drive you round the twist.

Who do you believe? Capital Economics and a halving of the iron ore price, or Goldman Sachs and their ‘nothing to see here’ message on China?

Believe only in yourself.

And believe in the power of dividends, and of compounding returns, over the long-term.

Make fewer investing decisions, certainly around selling. The really big stock market gains are made over a period of years, not days and weeks. Let your winners run and run and run. Water your flowers. Pull your weeds.

Reinvest your dividends, either back into the same company via a dividend reinvestment plan (DRP), or into a new company, ideally one also paying a decent dividend yield.

An Avalanche of Dividends Heading Your Way

Over the next few weeks, $22 billion in dividend payments will be paid out by ASX-quoted companies to shareholders, many of whom will be self managed super funds (SMSFs).

Dividends. You’ve got to love them. No matter what the share market, they keep landing in your bank account, like clockwork.

And in this low interest rate environment — unlike any other period, certainly in my lifetime — dividends are more valuable than ever.

Where else can you earn a circa 5% return, which grosses up to over 7% for stocks paying fully franked dividends?

There is a small price to pay for such extravagant returns.

It’s called risk.

Unlike a term deposit, when investing in shares, there’s always a risk of capital loss.

Fortunately, there are two ways to mitigate the risk…

1) By diversifying your portfolio across 15-25 different stocks, and across a good number of sectors. To be clear, having 70% of your wealth tied up in Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) is not a diversified portfolio.

2) By extending your investing time-horizon to 3, 5, 10 years or more.

Fret about the possibility of a coming stock market and you risk missing out on the long-term gains on offer, especially for income-hungry investors.

If you are worried about a coming stock market crash…

For those concerned about a pull-back, keep some cash up your sleeve. You’ll be able to sleep easier at night, and you’ll have some dry powder to put to work if and when share prices fall.

But also be aware, when markets do inevitably fall, you’re much more likely to act like a rabbit in the headlights, wary about investing when the stock market is in free-fall.

Take February last year, when the S&P/ASX 200 Index was trading at 4,765 and officially in bear market territory, having fallen 20% from its March 2015 high…

Did you pile all that dry powder into the market? It was THE perfect buying opportunity, the one you’d been patiently waiting for.

Data from the ATO showing the cash balances of SMSFs staying steady at around 25% from June 2015 to September 2016 suggests most investors remained frozen to the spot.

Sometimes it pays to step back and look at the bigger picture, and listen to the world’s greatest investor, Warren Buffett, rather than yet another naysayer peddling gloomy forecasts…

“… the best thing with stocks actually is to buy them consistently over time.”

You can do the maths yourself.

Earn 2% in term deposits, with zero prospect of capital growth.

Or earn 5% or more in a diversified portfolio of ASX dividend paying stocks, with the very real prospect of significant capital appreciation, over time.

HOT OFF THE PRESSES: Motley Fool's #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this 'under the radar' consumer favourite is both a hot growth stock AND our expert's #1 dividend pick for 2017. Now we're pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is click the link below!

Simply click here to receive your copy of our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Of the companies mentioned above, Bruce Jackson has an interest in BHP Billiton.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.