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There have been some grim economic forecasts for the British economy this week. Investment bank Goldman Sachs They warned that UK inflation could rise to 22% in winter if gas prices rise. This high inflation can lead the economy into recession. When we hear such dire predictions, it’s natural to wonder if we’re about to see a stock market crash. Here’s how I’m processing all of this.
Inflation and the stock market
To keep inflation stable, the government has set the Bank of England’s inflation target at 2 percent per year. This stability helps businesses and consumers plan for the future. Stock markets like this level of exposure to the economy and company earnings.
If inflation is 10 times higher than this 2% target, it clearly shows that the UK economy is in for a rough ride. Consumers cut back on spending, which hurts companies’ earnings potential. The stock market may fall to reflect this decline. It may even fail.
So what (if anything) should I do to prepare my portfolio for this opportunity?
The longest game
One of the most important lessons I’ve learned as an investor is to always remember the game I’m playing. There are many strategies and games being played in the stock market every day. There are day traders, speculators, hedge funds and robot traders who buy and sell thousands of stocks per second.
I like to use the metaphor of football when I think about this. Imagine there is a giant field (the stock market), and thousands of different football games are being played at the same time. Professional, amateur, pentagonal, futal, penalties, etc. Each player is trying to win (come back) in his own game.
However, most of these players are not playing my game, which is a long-term investment. I have a different time frame for these other investors, but we are all in the same stock market. So I have to know which game I’m going to play and stick to it.
Success is where preparation and opportunity meet.
For me, going long as an investor means I’m not afraid to sell my position when a downturn hits the market. I try to remind myself of this as much as possible, especially when the markets are down. It really helps me focus on my long term plan of slowly building wealth over time.
It wouldn’t be good to see the value of my portfolio fall if the market crashes. But I’ve built up some cash reserves so I’m not forced to sell my shares at a lower price.
I also made a list of great companies that I would want to own if their stocks went on sale during a crash. These British drinks include giants Diageo And WatscoA leading HVAC distributor in America.
Ultimately, no one knows for sure when a stock market crash will occur. If this is winter, I will use it as a buying opportunity to add more stocks to my portfolio.