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I’m currently being very careful with my stocks and shares ISA. I think the recent stock price rally is short-lived and stocks have a way of falling before the next bull market.
To prepare myself for a stock market crash, I’m looking to do two things. The first is a penalty for how often I’m adding money to the ISA. The second is to make sure I’m buying stocks at prices I think are attractive.
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Adding money
The first part of my plan involves a penalty for depositing cash. In general, I try to follow Warren Buffett’s advice and add money to my account periodically throughout the year.
This can be difficult to do when stock prices are down. For me, it can be easy to add money quickly because stocks are cheaper than last week or last month.
The problem with doing this is that stocks can get cheaper! If I add more money in September to take advantage of a lower price than in August, I would be making a bad move if the market is lower in October.
Buffett advises most investors to add money gradually because no one knows when the stock market will bottom. But by investing gradually, I can make sure I have money to invest when that happens.
Share prices
As long as I can wait for them to recover and I’m sure they will arrive, a sudden fall in stock prices won’t be a problem for me. But this depends on me not paying too much for the shares I own in the first place.
For example, I’m looking at buying stocks. Diploma My portfolio for now. I think the underlying business is great and I want to be a shareholder.
But in my view, the share price of diploma is a bit high. The stock currently trades around £25 and I think its fair value is closer to £20.
If I buy shares at £20 and the price falls significantly, I can be sure that the business (in my view) will recover as it is worth it. But if I pay £25 a share, I can’t have that confidence – I never thought the shares were worth that much, so why should anyone else?
That’s why it’s important to me to be disciplined about buying stocks. As long as I am confident that the share price will recover, I do not need to sell my shares when the price is low.
By doing this and staying disciplined about how much cash I put in at a time, I think I’m saving my stocks and shares ISA to survive a stock market crash.