How to predict the next market crash

Mark Taylor is chief customer officer at Selftrade.

There has been talk of a stock market correction on the cards for some time now, and while fears so far have been unfounded, many of the warning signs are flashing red. Surely, it’s only a matter of time until markets tumble? 

After a stellar year for stock markets, we are just six months away from the longest bull market ever recorded, the previous record being set in the run up to the 2007/08 financial crash. It would be foolish to assume that the markets will continue to grow indefinitely. History has shown time and again that a major market correction happens about once a decade, and analyst predictions that another is overdue have gained momentum over the last few months.

Anything from Brexit, to the situation in North Korea, the unpredictability of President Trump, and concerns over the Chinese economy could spook investors and trigger a major market adjustment. 

So, what should investors do to prepare their portfolios in case of a downturn?

1. Timing the market is extremely difficult to do. Therefore, spread your wealth – don’t put all your eggs in one basket. In 2018, consider the wider political and economic issues that may impact your investments and spread your money across different sectors, markets and geographies to make sure that if there is a negative impact on one of those you have chosen, so that not all of your money is in danger.

2. While focusing on diversifying investments, investors should certainly consider those assets viewed as ‘safe’ in times of volatility. Long dated bonds are not a particularly exciting investment, and are not as profitable in the long-term, but they have proven to be reliable at times when the market is under strain. 

3. Gold is also a good option, generally regarded as a ‘safe haven asset’, and usually recognised as a solid long-term investment. Historically, gold has kept its value over time, which is of course not a guarantee of future performance, but research has shown that in most countries gold is not linked to other financial assets, and so is a safe place to invest if the market is turbulent. Given gold’s tangible value it is a good option for a diversified portfolio as insurance to protect against adverse global events. 

4. Commodity-backed ETFs are a good way to gain initial exposure to this part of the market. For investors interested in physically owning commodities like precious metals there are also specialty banks or brokerages that provide direct purchasing opportunities.  

5. Japanese Yen is an attractive investment in times of uncertainty, particularly given the sheer size of Japan’s foreign investments. Their net foreign asset position is significant so at times of economic uncertainty, or global tension, funds can be repatriated, which increases the currency gains. Yen also has a good historical performance at times of global risk – according to November 2016 study in the Financial Markets and Portfolio Management the currency is the strongest ‘safe haven’ investment in periods of excessive volatility.

6. At times of uncertainty cash can be a reliable option, when held in robust institutions, because your returns aren’t impacted by stock market volatility.  However, try to avoid putting too much in cash – while interest rates remain low and inflation is high, the real-term value of cash is falling. As a general rule, it’s sensible to hold the equivalent of three to six months’ expenditure in cash.

7. In uncertain times, it’s always a good idea to adopt a defensive posture while staying invested in the equities markets. This can be achieved by targeting stocks with low return volatility. There are a number of ETFs out there that track and screen for volatility such as iShares MSCI Europe Min Vol UCITS ETF (IMV) or iShares MSCI World Min Vol UCITS ETF (MINV) – both of these feature in Selftrade’s ETF 100, a list of best performing ETFs. 

And finally, don’t panic! - if you are invested for the long-term then markets typically recover; timing the market is pretty much impossible. 

Mark Taylor is chief customer officer at Selftrade. 

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