Market crashes happen.
Here at The Motley Fool, we don't tend to make predictions about when they may occur, or what the damage may be, but we would be naïve to suggest they don't occur at all.
After all, they're an inevitable factor when it comes to investing in the share market, being every bit as normal as a boom or a bubble. The market never goes up in a straight line and it can tend to get sold off heavily in the short-run, before reversing course and heading north-east in the long-run.
Of course, there's always someone predicting doom and gloom for the market. Whether it be the predictions about a great housing crash – particularly in Sydney and Melbourne as well as the mining-impacted areas of Western Australia and Queensland – or the collapse in oil prices earlier in the year, the market always has something to worry about.
Well, most recently it has been fears of Brexit. On 23 June, Britons will meet and vote regarding whether they want to stay in or exit the European Union. While some suggest Brexit would be a non-event, it is feared Brexit could have a contagion-like effect on the global economy, spreading fear and uncertainty through the markets.
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has already dropped considerably from its recent high, although it rose strongly again on Monday as those fears allayed somewhat.
However, the threat has not been eliminated just yet with those wanting to leave and those wanting to stay in the EU seemingly split down the middle. The decision really could go either way and the market could be in for a heavy fall if Britain does vote to leave.
Here's how to survive a market crash
Investors typically hate uncertainty, with many preferring to flee the market in favour of the safety of either gold or cash.
Indeed, market crashes can hurt like hell at the time, constantly tempting investors to sell at lower prices to simply end the pain. As rational as that may feel at the time, it's typically best to sit on your hands and do nothing. Selling may relieve pressure in the short-term, but it can also hurt like hell down the track when you watch the shares of those quality businesses climb again, often surpassing their previous highs as life goes on.
Of course, it can be extremely difficult to resist the temptation to sell when everything is screaming at you to do so, so the best course of action may be to simply ignore the noise. Most people don't need to check their brokerage accounts every day, so if you can get into the habit of only occasionally checking it and not remembering the price you paid for each and every share, it may ease your short-term anxieties.
Finally, it is always important to have some cash at the ready. This is important for the obvious reason of not being 100% exposed to the share market if a crash does occur, while it also provides you with the opportunity to put more money to work when shares are trading at dirt-cheap prices.
Just take a look at the Global Financial Crisis. Investors who sold near the bottom have missed one of the greatest bull markets of all time, while many of those brave enough to buy during the height of that uncertainty have made some enormous gains. Some of the companies that I have my eye on include Wesfarmers Ltd (ASX: WES) and Bellamy's Australia Ltd (ASX: BAL), together with Cochlear Limited (ASX: COH) and Westfield Corp Ltd (ASX: WFD), each of which could make for great buys if they fell from their current levels.
Indeed, I may even consider buying shares in Commonwealth Bank of Australia (ASX: CBA) if its shares fall sharply enough. While I consider its shares to be somewhat expensive now (and risky based on some of the headwinds facing the economy), they could be a great buy at a lower price.
Of course, you don't necessarily have to look forward to a market crash (which some of the world's greatest investors have stated they do, because it creates better buying opportunities), but it is important that you don't let the prospect of one paralyse you.
Make sure you're prepared for a market crash (whether it happens as a result of Brexit or not) by following some of the steps mentioned above, whilst also ensuring your portfolio is diversified and consists of businesses that are built to withstand tough economic environments.
One example is Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), but there are plenty of other great businesses to build your portfolio around as well.
