Stock Market Crash and How to Avoid Another

With the recent economic downturn, it’s easy to panic and lose hope in investments, shares and the stock market in general. Most people play a short term game and for them, sudden drops in the market price are usually catastrophic.

Granted, the recent downturn has seen an extended period of low returns, but the wise investor (with a long-term strategy) will see this as an opportunity, rather than a problem.

When the market is low, it’s paradoxically a good time to be buying shares . . . prices are low and the principle rule is to buy low and sell high.

Although this doesn’t replace due diligence in researching your potential investment stocks, it does mitigate the risk of investment somewhat as the cost of purchase is so low. Given the market has almost bottomed out in some areas, it won’t take too long before you start seeing some growth on your initial outlay.

As with anything, there’s no crystal ball and there’s no way to tell what company is suddenly going to skyrocket in value, but a sensible investor knows that although the reputation of the market is largely inflated by these one-hit-wonders, the chance of landing such opportunities is few and far between: slow and steady wins the race 99% of the time.

One tip to keeping your share portfolio ticking over in difficult times is to be prepared to adapt. During a time when money is short for everyone, investing in evergreen commodities that people will always need is usually a safe strategy.

There is also a burgeoning market in credit providers who lend money to those in bad financial situations. The annual return for Provident Financial for example, was well above expectations thanks to huge growth from its credit card company, Vanquis Bank.

Some will point at the sub-prime mortgage market as a potential risk factor; it was, after all, one of the triggers in the global economic crisis. However, having weathered the initial storm, many of these adverse credit lenders now have far higher standards when accepting new accounts, and place far stricter controls on spending.

This results in fewer accounts lapsing into delinquency and threatening profit margins, which due to the large interest sums charged on “risky” credit, usually provide a healthy return.

Like any economic system, the market is cyclical – although it’s down at present there are still a few companies continuing to do well, and over time, share prices will rise.

Tech stocks (especially Apple) have maintained steady growth, but although they look temptingly safe, they represent a dearer option to buy into at the moment.

It’s worth bearing in mind that Apple too nearly hit the skids before Steve Job’s timely intervention, and those that are reaping the real benfits of a healthy share price today are those who stuck through the uncertainties of earlier years and didn’t bail out on the company when the picture was far bleaker.

However, all that glitters is not silicon-based gold. The recent flotation of Facebook came on the wave of high publicity and an opening price that many felt was over-valued.

The social platform has flirted with valuation before, and every time has come up with a price that many industry insiders felt was far too high to reflect real value.

Unsurprisingly, the share price dipped sharply on its second day of trading and expect it to fall further over the next few weeks, until at least a clear business case for making money on Facebook emerges; one of the largest criticisms of the ad model was that users simply weren’t interested in clicking ads whilst they were on the network, however now it has diversified into online games and apps . . . but certainly isn’t the only player in this field.

Looking at adapting share portfolios in a sub-prime environment, another of the big winners (somewhat ironically, given the overall shortage of money in households) have been the gambling and bingo industries.

Most of these are currently involved in heavy advertising and have diversified into complex online offerings and prime television channels to maximise their reach to customers.

You may think this tactic is a little exploitative, but it’s working . . . people are spending, even in a recession and their parent companies have happy shareholders right now. It may not be a strategy you wish to pursue once the economy is back on track, but for some, ethical investments are having to take a back seat during the current climate in favour of proven returns.

Assuming things do start to perk up, what then? Once you start seeing returns from your stock investments, then make sure you diversify your returns. One of the criticisms of the UK’s handling of the economic crisis was Labour’s addiction to spending, even when the economy figures were good.

By not putting money aside (indeed, even liquidating financial reserves!), when the economy went into recession there wasn’t anything left to pay off the structural deficit, ushering in a series of austerity measures and cuts that hamper recovery.

To avoid this then, make sure that profits are invested in a diversity of offerings that can provide short, medium and long-term results. The stock market is volatile at best, even without considering high risk fund options, so a wise investor will take what they need from profits and try to put the rest away.

Again, using the example of Vanquis, they are now offering high interest fixed rate bonds for the upper prime section of the market, other bond offerings from mainstream banks are also performing well and can be a useful savings wrapper to store away funds for a rainy day.

It’s not the high-octane, bear-pit advice that could make an investor a millionaire overnight, but for every one who has made their fortune using high risk tactics, there are thousands who have lost significant sums (which is why these fund managers get paid a lot!).

Many home-scale investors plough all their returns into more share options as soon as they get a “win”, but each investment is a roll of the dice and hefty profits can soon be eroded by a series of hopeful and speculative investments that don’t perform well. Be prepared to move investments around to get the best value, depending on the current circumstances.

As with anything when time are tough – be sceptical of “quick win solutions”. When people are up against things, nasty business practices often emerge, and the stock market isn’t immune to this either.

Company over-valuations, duplicate books and wild claims by sales and marketing executives to try and boost their figures . . . all things that struggling companies use as survival tactics to get buy-in from investors, rather than a safe and sensible investment vehicle for shareholders to see a return.

One classic example of this would be vintage wine investments . . . despite several warning signals through the years of mis-selling, over-valuation and investors being charged for substandard or non-existent products, over 50 UK-based wine investment companies have collapsed in the past four years, costing investors an estimated £100 million.

As the old maxim says if it looks too good to be true; it probably is.

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