Stop worrying about a market crash: Do this instead

Investors understandably are becoming anxious about a plunge in share prices. But two experts say stop fretting and just be prepared.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Share markets have gained spectacularly since the COVID-19 crash back in March, even though the pandemic is far from over.

Valuations for some growth companies are now at historic highs, and that has many investors worried that we're in a bubble.

GMO co-founder Jeremy Grantham warned of exactly that earlier this month, saying current times are "terrifying" and that the huge bubble would pop soon.

"Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives," he said.

"Here we are again, waiting for the last dance and, eventually, for the music to stop."

But two Australian experts have advised investors to stop wasting energy worrying about a market crash.

"Don't constantly worry about a market collapse," Marcus Today director Marcus Padley said on Livewire.

"Just be alert to it. React, don't predict."

Forager Funds chief investment officer Steve Johnson agreed.

"If 2020 proved anything, it was that predicting the future is extremely difficult, if not futile," he said in a letter to investors on Thursday.

"We didn't predict the market bottom in 2020. We didn't anticipate the fastest bear market recovery on record. We simply tried to construct the best portfolios we could with the opportunities that were in front of us."

Reacting is more important than predicting

Johnson humbly referred back to a blog post he made on 17 February last year. This was a few days before stock markets around the globe started plunging.

"Investors have reacted perfectly sensibly to a significant event that is still unlikely to have a dramatic impact on the value of equity markets," he said at the time.

Despite this clearly incorrect prediction, Forager's funds performed well last year. The internal shares fund returned a very nice 38.3%, while Forager Australian Shares Fund (ASX: FOR) returned 21.6%.

"Writing a blog that looked foolish in hindsight was probably a blessing in disguise," Johnson said.

"It served as a timely reminder that great investment returns come from finding great investment opportunities. While many of those who predicted a market meltdown were wasting their time trying to identify the bottom, we were out there looking for stocks to buy."

Just because the calendar ticked over to 2021 it shouldn't change the themes relevant to stocks, according to Padley.

"Expect the bull market to continue – until it doesn't," he said.

"There is always something to worry about, but we really don't need to worry about things that could happen until they happen."

Here's what to do

Instead of losing sleep over the prospect of a market crash, both experts recommended being aware of the biggest risks for 2021.

Keep monitoring for any signs that those risks might rear their heads. Then if one does seem like it's likely, adjust your portfolio accordingly.

Padley said one risk he saw was the current vaccines could become ineffective because of a coronavirus mutation.

"Pandemic beneficiaries would soar, recovery sectors dump, gold will fly, and the market will briefly collapse. Mild forms of that will come with anything that dents the market's global economic assumption or delays it."

One big risk that both experts warned was any evidence that inflation was on the way up. That would force central banks to consider pulling up interest rates.

According to Johnson, investors have been assuming low interest rates to justify piling into many investments such as Tesla Inc (NASDAQ: TSLA) shares.

"There are theories, from ageing populations to technological improvements and low cost labour substitution, that explain low inflation or even deflation as a permanent feature of the developed world," he said.

"I don't have a strong view that those theories are wrong. But I know that when the whole market thinks something can't possibly happen, the consequences of that assumption being wrong are significant."

Padley thought central banks would be wary about hiking up rates too soon.

"The central banks are unlikely to allow a repeat of the 'taper tantrum' that caused the market to fall over in October 2018, so we can probably relax for this year at least."

Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Investing Strategies

A man has a surprised and relieved expression on his face. as he raises his hands up to his face in response to the high fluctuations in the Galileo share price today
Speculative

Bell Potter is tipping this speculative ASX stock to rocket 60%+

This stock is a high risk, high reward play according to the broker.

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Index investing

$1 in every $11 for CBA: Should you still buy the Vanguard Australian Shares ETF (VAS)?

CBA's influence in VAS is at unprecedented levels.

Read more »

Three young people in business attire sit around a desk and discuss.
Small Cap Shares

Tiny tech: 3 ASX small-cap shares with new ratings

Toby Grimm of Baker Young and Peter Day of Sequoia Wealth Management share their new ratings.

Read more »

a group of tech people gather around a computer operated by a young woman while the group looks on in support.
Growth Shares

3 of the best Australian stocks to buy and hold forever

These high-quality shares are rated as buys by brokers for a reason.

Read more »

A senior investor wearing glasses sits at his desk and works on his ASX shares portfolio on his laptop2
Dividend Investing

Why I think these 2 ASX dividend shares offer great buying right now

These two stocks could be two of the best dividend stocks to buy today…

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Dividend Investing

Buy BHP and this ASX dividend stock in July

Let's see why analysts are bullish on these income options.

Read more »

Happy young couple saving money in piggy bank.
Dividend Investing

I'd buy 5,264 shares of this ASX 200 stock to aim for $250 a month of passive income

This business is a great candidate for large and growing income.

Read more »

A young female investor sits in her home office looking at her ipad and smiling as she sees the QBE share price rising
Cheap Shares

Why I think these 2 ASX shares are bargain buys

These stocks look far too cheap to me.

Read more »