Right now you might be feeling pretty good about your portfolio.
Owning shares in great businesses like CSL Limited (ASX: CSL) or Sydney Airport Holdings Pty Ltd (ASX: SYD) over the last few years can seem like easy money.
However, dealing with market pullbacks is a natural part of investing too.
For people who have only started investing in the last nine years (hands up Millennials!) the next crash will be their first. If that's you, welcome.
There is a fair bit of talk about market crashes right now because volatility is extra low, asset prices are extra high, and the last noteworthy market pullback was an extra long time ago. That makes people nervous.
But rather than succumbing to worry, here are some important steps to take to prepare for the inevitable:
1. Strengthen your weak spots
An easy first step is to audit the weak spots in your portfolio; places where you might have too much exposure if things get ugly. Being over exposed to a single industry or borrowing to invest on margin can quickly get you into trouble.
For example, owning a portfolio of companies tied to consumer discretionary spending, say casinos and luxury skin-care products companies, would be a risk if spending slows down.
2. Don't underestimate how far prices could fall
In a recent Bloomberg column wealth manager Ben Carlson issued a reminder of just how steeply markets can fall when they turn:
"Since 1980, the S&P 500 has had 13 double-digit declines with an average loss of 24 percent." Ben Carlson via Bloomberg
Share prices can fall well below what you might think is a 'reasonable price'.
During the last financial crisis Commonwealth Bank of Australia (ASX: CBA) shares fell from $60 to $24. National Australia Bank Ltd. (ASX: NAB) shares fell from $43 to $17 and shares in Rio Tinto Limited (ASX: RIO), having been shunted over the edge by a dumped takeover offer from BHP Billiton Limited (ASX: BHP), plummeted from $155 to $32.
3. Prepare a 'buy' list
Preparing a watch list of top quality companies you want to own is both prudent and gives you something positive to focus on.
Fear and panic can take over, so have some cash set aside and be prepared to scoop up bargains overlooked by other investors.
4. Remember you're in this for the long-haul
The cost of superior long-term returns from owning shares is short term volatility. In the years ahead, good businesses will keep growing, keep generating cash, and keep paying out dividends.
Keep a long-term view and shift your focus to the decades ahead.
