Stock markets collapsed into bear market territory in record time earlier this year due to COVID-19. However, the rebound in the recovery has been equally unprecedented, especially as global economies are expected to experience a significant drop in GDP in 2020. Experts believe that stock markets are out of sync with the economy, which is why means another stock market crash is on the horizon.
However, if you follow Warren Buffett’s rules for investing, a stock market crash shouldn’t bother you too much.
Don’t sell for a lower value
You will lose money if you sell your investments. Technically, your net worth will rise and fall with the stock market. However, you only lose money if you sell at a loss. If you hold quality investments, they will stage a dramatic rebound when the market recovers.
The best days follow the worst
According to a JP Morgan report, six of the best 10 days for the S&P 500 between 1999 and 2018 occurred within two weeks of the worst 10 days. If you missed these 10 best market days, your annual returns would have fallen to just 2% from 5% over the past 30 years, reducing the value of your portfolio by 50%.
A market recovery is inevitable
Market crashes and economic recessions are some hard truths that cannot be escaped. However, a market recovery is also inevitable. There have been 38 stock market crashes since 1950 which have been followed by a rebound.
Have an emergency fund in place
If you can’t predict a market crash, you need to prepare for it. You need to focus on having at least six months of cash spending in an emergency fund. This means that you won’t have to sell investments when they are down due to a cash flow crisis.
A stock market crash is a buying opportunity
Warren Buffett has always advised buying stocks when others are selling. A stock market crash presents a golden opportunity to buy quality companies at a lower multiple. Additionally, if you invest in companies that pay dividends during a stock market crash, you will experience a higher return that can be reinvested to build long-term wealth.
One of the Canadian stocks you can buy is Fortis (TSX: FTS) (NYSE: FTS), a diversified utility heavyweight. Fortis is recession-proof and its regulated activities enable the company to generate stable cash flows through economic cycles.
Fortis stock is trading at $ 53, which means its dividend yield is 3.81%. So a $ 10,000 investment in the utility giant will yield $ 381 in annual dividends. The company has increased its dividends for 47 consecutive years and is one of the safest stocks on the TSX.
Its regulated assets allow it to generate high quality profits to support future payments. Fortis predicts that its base rate will increase to $ 40.3 billion by 2025, which will lead to higher profits and cash flow in the coming quarters.
We can see that Fortis is an ideal income generating asset and has survived multiple recessions over the years thanks to strong fundamentals. With operations in the United States, Canada and the Caribbean, Fortis also has a diversified revenue base.
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The Motley Fool recommends FORTIS INC. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.