Reports of stock markets being overheated have been dragging on for the last couple of years, and still no real market correction or crash in sight. In fact, market returns in that period have been great. However, with Trump’s tariffs and general global geopolitical instability ramping up, the likelihood of a major crash on the horizon feels more likely than ever. It’s important for investors to be ready for this, and to have a game plan for when it happens, even if that is just hold, hold, hold.
I am not a financial advisor, and I’m not going to suggest any course of action, but I am happy to share what I plan to do in the event of a crash. And it would be great to hear from others on this subject too.
So here goes. First a bit of context: I’m not earning and not a regular investor. I have sufficient capital and live off this, so I need to sell equity to pay for my living expenses. Basically, I am FIRE, if you know what that is: Financially Independent, Retired Early. For anyone in this position (i.e. drawing down, such as pensioners too), we need to make sure we are not forced to sell equity at a low price, so this means having a significant buffer of money in less volatile assets, such as bonds, money market funds and cash. Normally I would have about 3 years worth of living expenses in these classes of assets, but because of my heightened concerns of a market crash, the depth and more importantly the length of that recessionary period, as well as some personal risk of increased expenditure in the next few years, I have been increasing my cash position over the last year, by selling equities. At this point, I have about 6 years worth of expenses in the less volatile asset classes. However, given the equity sales, I will also have a reasonably large capital gains tax bill come April. Unless there is a crash…
The first thing I will do in a crash is swap my equity position from one ETF to another, to generate a large negative capital gain. This would offset the gains from my sales earlier in the tax year, and so reduce my tax bill. Basically, I would be pushing that tax bill further down the road, when I may be able to spread it out more too, allowing me to pay tax at a lower rate.
How do I do this? Well, my equity is fully invested in a global ETF. I’m currently using the ACWI ETF, which invests in the MCSI all world index and has a Total Expense Ratio of 0.12%, which is fairly low. If the price of that ETF drops significantly below what I paid for it, I can sell it to generate a capital loss (a negative capital gain). What I must not then do is buy it straight back, as HMRC has two rules (the same day rule and the bed and breakfasting rule) that mean I cannot then claim the loss. However, what I believe I can do (and please correct me if I’m wrong, anybody - I’m not a financial advisor) is immediately buy shares in a different ETF. For me, this ETF will be WRDA, since it invests in the same index, and has an even lower TER of 0.06%. The way I will do this is to change the allocation of the portfolio from 100% ACWI to 100% WRDA, and hit the rebalance button on the morning of the day I choose to trade. This will mean my shares are sold and bought at the same time, so my money isn’t out of the market, and I don’t miss out on any gains or losses in between the two transactions.
The second thing I will do in a crash is to move some of my increased cash position back into equity. I will use the cash I have recently built up to buy more of the global ETF at the lower price. Will I be able to buy at the bottom? Likely I won’t time it right. It may be that I buy too early, and my new stock drops a further 50%. That’s ok, as I expect it to still bounce back in the coming months or years (though there is of course no guarantee of this). It may also be that I buy too late, after the stock has bounced back significantly. That too is ok. I don’t need to maximize my gains, I just need to buy in at an attractive price - one that is significantly lower (e.g. 30%+) than today’s price. I will again do this by rebalancing, to sell shares in a money market ETF (I’m using CSH2) and buy shares in WRDA at the same time. Note that I must be careful not to buy any shares in ACWI within 30 days of my sale of them, to avoid triggering the bed and breakfasting rules.
This strategy is by no means suitable for everyone. How about you? Are you mentally prepared for a crash? What will you do?
