How to prepare for a stock market crash

Warren Buffet is accumulating a great deal of cash at the moment. After selling more of Berkshire's equity portfolio, including massive portions of its stakes in Apple (AAPL -0.52%) and Bank of America (BAC 0.72%), the company ended the third quarter with a record $325 billion in cash and Treasury bills on its balance sheet. That's up $48 billion from the previous quarter.

His trick has always been to buy good companies at a low price and hold. It seems he is getting ready to buy again which perhaps means he is expecting to see a bear run and can buy good companies at a cheaper price.

WB doesn't see much gain in top quality large companies at the moment. They seem overvalued. Small/mid-cap companies are not worth his time and effort (he could buy them all outright if he wanted with $325 billion). So I think he is expecting a bit of a correction but meanwhile is probably earning a nice 5%+ on his cash pile whilst he waits.

So what should we do if the SHTF?

ETFs for AI, Robotics and CyberSecurity

I think technology will pay a big part in modernising industry. Labour is becoming increasingly expensive while AI and robotics now have big advantages. Robots can work 24 hours a day, they don't need toilet breaks or get hangovers or go on strike. They are cheap to run and work really fast.

Self-driving cars are a distraction however. Like NASA developing rockets to get us to the moon when really the super-powers just wanted the technology to develop nuclear ICBMs, with AI and robotics, we develop this technology to then build semi-dedicated robots to replace our human workforce.

AI robots can also be good for the environment. Consider a small robot vehicle with four legs, cameras, GPS, LED lights and pincers for arms. Now train it to recognise wheat plants and weeds and set it down in your newly-planted field of wheat. It will work 24/7 in that field and de-weed it for you without pay! It will have a solar powered charging station to dock with every few hours. No weed killers needed! Now also equip it with an insecticide spray and train it to only spray wheat plants which show signs of infestation. This reduces the use and cost of insecticides and means more environmentally-friendly ones can be used.

Such devices have already been developed!

ETFs

So I am picking two ETFs for my 'risky but high returns' experimental portfolio:

Is now a good time to buy UK FTSE shares?

The FTSE 100 index stands just 15% higher than its level of 31 December 1999, representing a compound annual gain of barely 0.5% per annum. 

UK investors, insurance companies and pension companies have started to see the light and are leaving UK stocks for the shinier US market. A few UK companies are even starting to de-list from the FTSE and move over to the New York/NASDAQ stock exchanges.

However, if you discount the USA's 'Magnificent Seven', the UK has still performed quite well. Good UK companies are well diversified and pay good dividends. The UK also has some solid top performers as shown below (gains in 1 year):

• RR      Rolls Royce 67%
• NWG  NatWest Group 63%
• SMDS Smith(DS) Group 51%
• HL       Hargreaves Lansdown 49%
• BARC Barclays 48%

Which core ETF should I pick?

Many people like to have a core+satellite approach with their portfolio.

A popular choice for a core ETF is either:

1. MSCI global index ETF (SWDA or HMWO)
2. MSCI global Quality index ETF (XDEQ)
3. S&P 500 index ETF (VUAA or VNRA or CSPX)

For the past 5 years, the S&P 500 has shown much better returns than the MSCI global index (SWDA) however.

If we look at the performance over the last 5 years, the S&P 500 ETF VUAA has consistently performed better than SWDA or XDEQ and CSPX is slightly better.

ETFs better than EQQQ or S&P 500 in Q4 2024!

Amazon does not feature much in high-performance Tech and Comms ETFs such as IITU or IUCM and comprises only 5% within the Nasdaq EQQQ ETF.

Some Consumer Discretionary ETFs hold a large proportion of Amazon (30%) and also Tesla (15%) such as XUCD (or XSCD for GBP). If you think Amazon and Tesla will do well next year when Trump takes over, this may continue to show good gains. I think Amazon will continue to show good performance next year although import tariffs and tightening advertising regulations in the EU and UK may adversely affect the Amazon online retail business.

Note: The ETF IUCD is very similar to XUCD and is available on Trading 212.

Consumer Discretionary (blue) has shown good gains recently, mainly due to Tesla (and Amazon).

Here are the top holdings of XUCD/IUCD:

Compare holdings:

EQQQ is a compromise, but as there is not too much overlap between XUCD and my two favourite top Tech S&P 500 ETFs IITU (60% in Apple, NVidia, Microsoft) and IUCM (30% Alphabet A+C) you could also add XUCD or IUCD to these two Tech ETFs - see below.

Top stock tips (2024/11/24)

Here are some stocks/funds which seem to be performing well which you may like to research further for investment in the near future.

Raymond James Financial  (RJF)   least risky, 17 P/E

Aberdeen International   (AAB)    

Victory Capital Holdings (VCTR)  currently overvalued?

WisdomTree Inc           (WT)             

Royal London Global Select      

AMD      (AMD)                   cheap buy at present - hold for future gains

Nvidia   (NVDA)                  for 2025 - buy on dip?

Palantir (PLTR)                  risky as has very high value and P/E ???

Nvidia and Victory have ex-dividend in early Dec.   RJF is least risky

Also keep your eye on ASML which seems very undervalued at the moment.

Are Tech stocks safe?

Tech and Financials should both show good performance.

I have favoured XDEQ for world quality stocks with less in the USA and which hold approx 30% Tech but less than 10% in finance. I also have some EQQQ which performs very well when Tech is bullish. However, the Vanguard FTSE ETF VNRG is strong on Tech and Financials and may perform better in the mid-term and has outperformed XDEQ and EQQQ recently.

Please do your own research. This is not financial advice. Most of these are very volatile.

How to invest in Crypto?

Many people are tempted to trade in the cryptocurrency sector.

You could just buy some crypto currency such as Bitcoin or Ethereum from a broker such a Coinbase (COIN) or CRYPTO for Bitcoin. You need to also bear in mind that any crystallised gains made on a sell transaction of cryptocurrency may be a taxable event (e.g. Capital Gains Tax in the UK) and should be declared. Coinbase will inform HMRC of any large crypto inflows (I think around £5k+/yr going into crypto assets).

Many people invest in MicroStrategy (Nasdaq:MSTR) which loosely follows Bitcoin's performance (though you would be hard pressed to know what it does from the description!). MSTR uses investors money to buy Bitcoin and they will own approx. 4% of all Bitcoins soon. However, the share price has gained x4 more this year than Bitcoin has! It seems mad to me! It can be bought inside a ISA or SIPP unlike bitcoins or Ethereum, and so is popular with crypto investors.

There is also LON:ARB and Coinbase (COIN):

Another alternative is to buy a crypto ETF such as VanEck Crypto and Blockchain Innovators UCITS ETF (DAPP/DAGB). This can be bought within an ISA and thus gains are free of all tax.

The VanEck Crypto and Blockchain Innovators UCITS ETF seeks to track the MVIS Global Digital Assets Equity index. The MVIS Global Digital Assets Equity index tracks companies from around the world that are active in the blockchain industry.

 

The ETF's TER (total expense ratio) amounts to 0.65% p.a.. The VanEck Crypto and Blockchain Innovators UCITS ETF is the only ETF that tracks the MVIS Global Digital Assets Equity index. The ETF replicates the performance of the underlying index by full replication (buying all the index constituents). The dividends in the ETF are accumulated and reinvested in the ETF.

 

The VanEck Crypto and Blockchain Innovators UCITS ETF has 233m GBP assets under management. The ETF was launched on 30 April 2021 and is domiciled in Ireland.

I have added a few ETFs below from Justetf.com. The 'Trump effect' around Nov 4th is easy to see:

Trump Trades (stocks to buy now)

Trump stocks sectors that should show good performance in next 2 years are (with example ETFs):

• Crypto - e.g. DAPP, BLKC, CRYPTO
• Finance - e.g. IUFS 
• Industry (esp. Tech and Tesla) - e.g. IUSU, IITU or XLKQ, IUCM
• Oil/Energy - e.g. IESU
• Defense - e.g. DFNS  
• S&P 500 and Nasdaq - e.g. EQQQ, HSPA

Personally, of these, I am just investing in only some of them: EQQQ, IUFS, IUSU, IITU, IUCM and also some IESU (2%).

The Trump effect (and what should I buy now?)

My core ETFs (80+% of portfolio) over the last 6 months to 1 year have been (in descending order of value):

• SWDA MSCI Global ETF
• XDEQ World Quality Factor ETF (may change to XDEM soon as includes financials)
• Royal London Global Equity
• XLKQ Xtrackers MSCI World Quality ETF (better perf. at 46% than SWDA 26%, XDEQ 25%, EQQQ 30%, XDEM 31% in last year!)
• IITU    iShares S&P 500 Info Tech Sect ETF GBP
• IUCM iShares S&P 500 Comm Sect ETF USD
• IUFS   iShares S&P 500 Financial ETF USD
• EQQQ Invesco NASDAQ 100 (I will be increasing this soon)

Following the USA election results, the 'Trump effect' has given all of these a boost of between 2%-5% in the last few days.

My core ETFs

Should you keep your emergency 'cash pot' inside a Flexible ISA?

In the UK, we can put up to £20K into a tax-free ISAs each year and any capital gains are completely tax free.

Emergency cash pot

Many people (and particularly the self-employed) will have an emergency 'cash pot' which they can withdraw cash from should an emergency arise, such as if being unable to work due to accident or health, loss of job, unforeseen expenses, etc. 

If you need to withdraw funds (e.g. due to temporary loss of income) it is best to withdraw from your emergency cash pot which typically holds at least 3-6 months of income rather than sell your high-gain stocks/ETFs and be out of the market.

Unless you are retired and are drawing a good pension, you may need an emergency pot that is large enough to support you for at least 6 months or so, especially if you don't have any other 'cash' resources.

This pot should not be invested in volatile assets because it needs to be available at all times - if you invested it in the S&P500 and the stock market went down 50% just when you needed the cash, you would only have half the emergency funds you thought you had!

When the s*it hits the fan...